$90 W2 vs $95 Corp 2 Corp. Should I switch??

[TheAnonOne]

I currently work as a consultant for $90/h and have the option to switch to C2C at $95

Is it worth it though?

With the new tax law I know I get the 20% pass through deduction, I can do a solo 401k, and possibly pay myself under the SS limits and avoid a little of those.

Does anyone have an easy calculator to show the difference or know how to do a quick napkin side-by-side comparison?

$90/h W2 is something like $180,000 a year and I get to deduct 18.5k for my 401k making my AGI ~$161k without too many other deductions. (I don't really travel much or buy many things, so it's not deduction heavy by any means)

I have been toying with this idea for a long time and many do it in my industry (software) just haven't done it myself and I won't unless its worth something reasonably substantial.

[Papa bear]

Are you sure that you will be eligible for the 20% deduction?  I was under the impression that individual contributor / contractors type service jobs would not be eligible.

Other than that, normally we recommend getting 10-20% higher on Corp-Corp or 1099 work. 

Are you working through an agency with this?  Usually that option will come up with agency positions with such a low spread. Fringe costs for a W2 employee, full time, client employed, is usually 20-30%. Fringe costs, agency employed, which usually means little to no benefits, is 15-20%. 


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[Papa bear]

To clarify on the ranges: when we agency w2 employees, our fringe was 15.7%.  If we W2 full time contractors, with “on bench” time, fringe costs were closer to 50%.

Internal employees were closer to 30%


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[TheAnonOne]

Are you sure that you will be eligible for the 20% deduction?  I was under the impression that individual contributor / contractors type service jobs would not be eligible.

Other than that, normally we recommend getting 10-20% higher on Corp-Corp or 1099 work. 

Are you working through an agency with this?  Usually that option will come up with agency positions with such a low spread. Fringe costs for a W2 employee, full time, client employed, is usually 20-30%. Fringe costs, agency employed, which usually means little to no benefits, is 15-20%. 


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No, I am not sure I qualify for anything. I am trying to find out though.....

Yes, I work through an Agency for almost 100% of my contracts. I assume I can get at least the 7% or so by switching.

[MDM]

Are you sure that you will be eligible for the 20% deduction?  I was under the impression that individual contributor / contractors type service jobs would not be eligible.

They are eligible if taxable income is below $157,500 for a single filer.  $180K - $18.5K - $12K = $149.5K, so as long as other net income is below $8K....

[TomTX]

Are you sure that you will be eligible for the 20% deduction?  I was under the impression that individual contributor / contractors type service jobs would not be eligible.

Other than that, normally we recommend getting 10-20% higher on Corp-Corp or 1099 work. 

Are you working through an agency with this?  Usually that option will come up with agency positions with such a low spread. Fringe costs for a W2 employee, full time, client employed, is usually 20-30%. Fringe costs, agency employed, which usually means little to no benefits, is 15-20%. 


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No, I am not sure I qualify for anything. I am trying to find out though.....

Yes, I work through an Agency for almost 100% of my contracts. I assume I can get at least the 7% or so by switching.

Which would be more than eaten up by you having to pay the "employer side" for Social Security and Medicare taxes.

[SeattleCPA]

Are you sure that you will be eligible for the 20% deduction?  I was under the impression that individual contributor / contractors type service jobs would not be eligible.

They are eligible if taxable income is below $157,500 for a single filer.  $180K - $18.5K - $12K = $149.5K, so as long as other net income is below $8K....

So the proposed regulations, which appeared a while back, cleared up how this works. And it turns out, the principal asset disqualification, which is what I think we're talking about here, would not apply to OP's situation:

More information here: How the Section 199A principal asset stuff works... but basically, this is only something celebrities need to worry about.

Note, however, that while the principal asset "disqualification" isn't an issue for OP's situation, the W-2 wages limitation may be. But an S corporation will fix that.

Also this comment: I would guess OP can save quite a bit of payroll tax with an S corporation and then quite a bit of income tax with the Section 199A deduction.

E.g., say the OP pays him or herself $80K in base wages because that's a reasonable compensation amount. If he or she also treats the shareholder health insurance correctly, that'll create maybe as much as a $20K nontaxable fringe benefit. The employer match for the SEP or 401(k) in this case might equal $25K (or 25% of the $80K plus the $20K).

This will maybe mean OP saves about $8K in payroll taxes via the S corp. And about $3K via the Section 199A deduction.

Note: I'm estimating the Section 199A deduction savings as 20% of the leftover $60K-ish of S corporation profit times a 24% marginal tax rate.

[MDM]

More information here: How the Section 199A principal asset stuff works... but basically, this is only something celebrities need to worry about.

Interesting, thanks!

For those wanting to go straight to the source, see https://www.irs.gov/pub/irs-drop/reg-107892-18.pdf, starting on p. 52, "2. Definition of specified service trade or business", but particularly on p. 65 starting with

In sum, the Treasury Department and the IRS believe that the “reputation or skill” clause as used in section 199A was intended to describe a narrow set of trades or businesses, not otherwise covered by the enumerated specified services

If one works in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, or dealing, however, see instructions specific to those fields in the referenced document.

[SeattleCPA]

More information here: How the Section 199A principal asset stuff works... but basically, this is only something celebrities need to worry about.

Interesting, thanks!

For those wanting to go straight to the source, see https://www.irs.gov/pub/irs-drop/reg-107892-18.pdf, starting on p. 52, "2. Definition of specified service trade or business", but particularly on p. 65 starting with

In sum, the Treasury Department and the IRS believe that the “reputation or skill” clause as used in section 199A was intended to describe a narrow set of trades or businesses, not otherwise covered by the enumerated specified services

If one works in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, or dealing, however, see instructions specific to those fields in the referenced document.

Kind of related to above, one other thing I note is that the "consulting" category is pretty narrow.

Most people who call themselves "consultants" probably aren't really consultants according to Section 199A. You need to be giving advice and counsel or doing political lobbying.

Programming or working as an independent 1099 contractor don't count.