W-2 Contractor vs Truly 1099 Contractor

[Insanity]

I wanted to gauge people's thoughts (disregarding the IRS defines what is truly 1099 vs W-2).

I am currently employed by a contract agency as a W-2 Contractor.  It was supposed to be a contract to hire position.  While I did have the opportunity (I passed on it because the cost really wasn't that much better than staying on COBRA or going on my own plan) to get health benefits, they do not provide any 401K matching, and very little of anything else. 

So, I'm trying to figure out what the actual rate is for a strict transfer from W-2 to 1099.  The agency wants to simply role in the taxes that they are paying and keep whatever little (at it is little) profit they are making.  What is the percentage that I need to ask for?

Thanks.

[willn]

So you are being paid as 1099 by the agency (A) that has farmed you to another company (C)?  And C wants to hire you?   Or A wants to hire you?

Assuming A wants to hire you as a W2 employee, seems like a simple math problem.  If there are additional benefits to being an employee that you weren't getting, and they are now paying for, you'd reduce your rate by a commensurate amount.  They are also now paying employment taxes (FICA).  They will withold other taxes that you'd more or less be paying anyway as 1099, like state and federal income tax.   The rate they pay you may also be discounted some to account for the overhead they incur paying you as an employee, such as workers compensation, or for equipment and office space that you may use now.

You may have some leverage as they seem to like you enough, so it may be prudent to try and get a small raise. Or view it as a stepping stone to a continuing career path.  Work like you have the job above you, even though you aren't getting paid for it...yet.

[Insanity]

So you are being paid as 1099 by the agency (A) that has farmed you to another company (C)?  And C wants to hire you?   Or A wants to hire you?

Assuming A wants to hire you as a W2 employee, seems like a simple math problem.  If there are additional benefits to being an employee that you weren't getting, and they are now paying for, you'd reduce your rate by a commensurate amount.  They are also now paying employment taxes (FICA).  They will withold other taxes that you'd more or less be paying anyway as 1099, like state and federal income tax.   The rate they pay you may also be discounted some to account for the overhead they incur paying you as an employee, such as workers compensation, or for equipment and office space that you may use now.

You may have some leverage as they seem to like you enough, so it may be prudent to try and get a small raise. Or view it as a stepping stone to a continuing career path.  Work like you have the job above you, even though you aren't getting paid for it...yet.

Currently A is paying me as a W-2.  A provides very little benefits (health is only a minute savings over going on my own and that is about it).  No paid vacations. They are basically currently act as a temp agency so that C doesn't have to deal with any HR issues until they are sure they want to do the hire.  A is also making very little profit (they actually disclosed the numbers) because they are providing a significant quantity of contractors to the client C. 

I want to go corp to corp so I can take advantage of the benefits of my own company.  I'm not going to be able to get a raise, so I just want to make sure I do get the right percentage increase to cover FICA and other taxes that the Agency is paying.

[willn]

Ok, I see.    In general in the US you can expect it to be about 15% of your net income.  This should give you an estimate and a bit more info on the SS tax thresholds:

http://www.bankrate.com/calculators/tax-planning/self-employed-business-tax-calculator.aspx

[Chiron]

1) Whether you are classified as W2 or 1099 is not simply your choice.  It's a legal question regarding your relationship with the company, your duties, responsibilities, their oversight, etc.  the answer to which varies from state to state.  The company will likely not be able to simply switch you over to 1099 without redefining your position. 

2) The math from a tax perspective here is pretty simple.  If 1099, you'd be liable for 7.65% self-employment taxes that you weren't paying before (up to the SS threshold, then 1.45% beyond it). 

3) You give up rights as an employee that you won't have as an IC.  You should be aware of them (or consult a local lawyer if you aren't).  In addition, you may incur other expenses with your own business that you wouldn't as an employee.  If your work involves any sort of risk, you will need to insure against it as a business owner.  Make sure you account for this and other costs when determining the premium you will charge.

[Insanity]

1) Whether you are classified as W2 or 1099 is not simply your choice.  It's a legal question regarding your relationship with the company, your duties, responsibilities, their oversight, etc.  the answer to which varies from state to state.  The company will likely not be able to simply switch you over to 1099 without redefining your position. 

That is why I put the comment in the first sentence - I am aware of all that.  And the position will be re-defined in terms of hours.

[Chiron]

I see - I took that to mean you were disregarding the IRS consequences.  But it's not just the IRS who has a say here, it's also state-specific laws that will affect it.  This is mostly the company's problem to get the classification right, though.

[Insanity]

I see - I took that to mean you were disregarding the IRS consequences.  But it's not just the IRS who has a say here, it's also state-specific laws that will affect it.  This is mostly the company's problem to get the classification right, though.

Would much rather be W-2 with the client, but short of that happening, staying a W-2 with the contract agency is a waste.

[the fixer]

I can think of a few benefits you'd get being 1099:

• Possibility of taking the self-employed health insurance deduction (you can't be on COBRA and you can't be eligible for any employer's group plan, e.g. a spouse's)
• Possibility of deducting other business expenses
• Ability to set up your own retirement plans, such as a SEP IRA or solo 401(k), to shelter more income from taxes

These benefits suggest that you should move to 1099 even if they aren't offering you a full 7.65% increase over your W2 pay.