I could use some help (contract vs employee)

[Crinkle]

Yesterday was a bad day. I am having some serious issues here with my employeer. I recieved a phone call yesterday within the last 2 business hours of the pay period to inform me that as of Monday I will be a Contract employee. WTF??? I have worked for this company for 8 years now. Their reasoning being that they don't want to pay to register thier company in Colorado. What disappoints me the most is the way that this was handled, I highly doubt that they put that much thought into this move, other than it would save them some money. I am a remote employee, there are no other employees or places that they conduct business in CO or anywhere around here, they are primarily east coast.

What do I do? I am a sleep tech in basic terms (polysomnography=15 words across, big scrabble points). I analyze sleep studies and determine what the problem is with the patient, run reports, write a few comments to the doctor and send it back all from the comfort of my own home. Everyone in our deptartment works from home, so I am not that special. Even though I designed and help impliment the "at home scorer" program with this compnay when I use to work in the office in NJ. I am not going to lie, its a great gig and I really like what I do. It would be just about impossible for me to leave and make more money elsewhere.

So as of Monday I loose the following by going to "contract" status:
My 401k and the employee match of 25%
health insurance (which I don't use, i am on my wife's which is far better)
5 weeks of paid vacation
10 days of paid holidays
now have to hire an accountant

What do I gain:
more freedom? which I don't need, i was basically writing my own hours to begin with, even though I do have bosses.
$4 more per study that I score.
possibly increased liablility?
ability to write more off on my taxes.


I surely feel that I am getting the short end of the stick here, a measely $4 more per study will not cover all the items that I am loosing.

How much does it cost to register pre-existing company in another state? is it really that much?

I have already talked to one maggot about the tax implications of becoming a independent contractor vs employee, making me liable for an additional 6% over what I currently pay as an employee. (anyone want to confirm this?)

Anyone familiar with the "Twenty Factor Checklist to Determine Independent Contractor vs. Employee Status" ?? they basically determine "whether the person or persons for whom the services are performed exercise sufficient control over the individual for the individual to be classified as an employee"

many of these factors I meet as an employee, yet I know nothing of enforcing it.

To all the independent contractors out there, what else do I have to take into consideration besides, getting an accountant and paying quarterly taxes. I am unsure of the total tax difference between being an employee and contractor, so I am trying to figure out how much more money I really do need to make it the same (taking into consideration the loss of vacation/holiday/benefits) Is there an approximate figure out there?

I am just getting started looking into this, I have till Monday when I really start getting into this with my company. I do have to be careful, as a company in NJ they have the right to fire employees for no reason "at-will employment", same as CO. So I do have to be careful how hard and far I push this, as the job is not replaceable at the rate I get paid now.

any and all help is greatly appreciated

[Ireallyliketoski2]

Crinkle, will you need to provide your own insurance? Is the main thing you are losing as a contractor is the paid vacation and sick time?

I doubt you'd need to hire an accountant, my wife runs her own business as a self proprietor and I've done her taxes along with the estimated quarterly payments for about 4 years now. The first time through it took a little while but after that it wasn't too bad, just a few additional forms. If you don't have a lot of expenses, which from the sound of your business where you sleep all day and someone sends you a check, I can't imagine you would. Taxes are fun!

[RootSkier]

That looks like an enormous pay cut....surely they might negotiate?

Just the fact that you are now responsible for all your own taxes costs a ton of cash, nevermind the paid time off and benefits.

[Ireallyliketoski2]

Just the fact that you are now responsible for all your own taxes costs a ton of cash.

For a decent sized business I could see the argument here, but for a single guy in a home office I don't see how this should cost you any, let alone, tons of cash if you just do your taxes yourself. The first time through you will have to invest some time but once you educate yourself the subsequent years are a breeze.

[jpcski]

Sounds like a raw deal. Don't forget they will also not be paying 50% of the social security taxes they and you currently pay. That could be a big hit and effect your long term retirement plans. Couple that with the 401K loss and you are most likely taking a big pay cut.

You have probably already thought of those.

Good luck.

[Crinkle]

IRLTS, yeah i am loosing 35 paid days off a year, that is a big deal, the $4 does not cover it, needs to be a wee bit higher. Taxes are not fun, I have tried to do them in the past and need to bring in outside help from now on, as I always owe for some reason. Maybe after a few quarters I'll be able to figure it out on my own, but for now, i'm going to rely on the pros.

I am loosing the "ablility" to take thier health insurance plans/benefits. Currently I am on my wife's plan, which is much cheaper, but originally I had negotiated them to pay me what it costs to be on her insurance ($80/month)

I am hoping they are going to let me negotiate, since right now this offer puts me at a loss from what I make right now. I have yet to accurately figure out what it is exactly that I am loosing, but now I am going to want something additional.

[Crinkle]

Sounds like a raw deal. Don't forget they will also not be paying 50% of the social security taxes they and you currently pay. That could be a big hit and effect your long term retirement plans. Couple that with the 401K loss and you are most likely taking a big pay cut.

You have probably already thought of those.

Good luck.

yeah i already wrote that in my first post. they only match 25%, so i am going to have to include that in the renegotiate as well. I now need a tax defered retirement plan, I think the Roth IRA will cover this.

The additional 50% that you speak of I beleive is covered by the "self-employment tax", which I beleive comes out to be an additional 6% on top of what I pay now, but once again, not quite sure about these figures.

[Danno]

Do you have any leverage at all? Do they "need" you? Are there other similar gigs out there?

There are a lot of tax implications to being an independent contractor, so yeah, there are some hidden losses here. I don't know all of them, hopefully some knowledgable mag will be able to document them.

sucks man, good luck.

[guermo]

There are a lot of tax implications to being an independent contractor, so yeah, there are some hidden losses here.
sucks man, good luck.

Having your own business though (which is what being an independent contractor is basically) has many many tax write offs that you can creatively use to your advantage.

[Crinkle]

Having your own business though (which is what being an independent contractor is basically) has many many tax write offs that you can creatively use to your advantage.

already do that since I work 100% from home, internet, computers and equipment, claiming percentage mortgage for sq ft of house used and percentage of utilities. Please feel free to add to this list. Otherwise please be more vague in your next post

[Crinkle]

Do you have any leverage at all? Do they "need" you? Are there other similar gigs out there?

There are a lot of tax implications to being an independent contractor, so yeah, there are some hidden losses here. I don't know all of them, hopefully some knowledgable mag will be able to document them.
.

these implication and losses are what i am trying to find. help if you know them

as far as leverage, not sure, that could be quicksand or solid ground, tough to tell. No other similar gig available that I am currently aware, this company does pay well. They currently need me, my boss feels that he needs me, as I am the best at what I do in our department. It would be tough to fire me as a poor employee, but could fire me cause I cost too much.

[UTdave]

As an independent contractor you are then self employed. You will be subject to self employment (SE) taxes. Those are based on your net SE income as calculated on the schedule C which then flows to the schedule SE. You will be able to deduct all ordinary and necessary espenses for your job on the schedule c. Additionally, you will be able tto take deductions for your home office as well. SE tax is 15.3% for the first 94,200 of net SE income (in 2006, the 94,200 is indexed for inflation) then after that is 2.9%. You will be able to deduct 1/2 of the SE taxes before you compute your AGI and income taxes. As far as to whether your an employee or not the big questions to me are who controls how and when the work is done and do you have the freedom to do work for other sleep centers? If they do and no then I would say you should be considered an employee.

[Crinkle]

thanks dave, that led me to this gem, which could help reduce my tax rate if i incorporate myself

Taxation in the US
In the US self-employed workers are paid directly by clients or by their business, and some proportion of these payments will be due to the government as income tax. Unlike an employee of a company, a self-employed person pays tax after receiving his taxable income.

The self-employed in the United States are usually required to pay estimated income taxes quarterly. They pay both the employee and employer portions of the FICA tax and Medicare taxes, since they are considered both the employer and the employee. An employed person pays 7.65% (6.2% for FICA and 1.45% for Medicare) through a paycheck deduction, and the employer pays the other 7.65%. The self-employed person pays both sides of this tax, or 15.30% total. This tax is reported on Schedule SE of the IRS Form 1040.

Many self-employed choose to incorporate to reduce this tax. Before incorporation, a self-employed person making $100,000 in business profit would pay 15.30% of that profit in self-employment tax, or $15,300. But with an incorporated business, the business can pay the owner $50,000 in salary and $50,000 in dividends (called "distributions"). The owner pays 7.65% of the $50,000 in salary and his/her corporation pays the other 7.65%, for $7650 total. Distributions are not subject to self-employment tax, so there is no FICA/Medicare tax on the $50,000 in distributions. Thus the business owner may save $7,650 in taxes. However, tax laws can be tricky, and do change, so it is usually advisable to seek the advice of a competent accountant in taking the decision to incoporate for the purpose of saving tax.

[lax]

just blowing smoke: given the clause (we went over last week) in a contract that the longer you're tenure as an employee there, the earlier they have to notify, if they fire you...would the same principle apply to long term workers getting demoted as well?

crinkle-do you really lose all your benefits monday!?!??!?!? they gave you no notice to find proper health insurance...surely you coul milk that for something?


even if its not technicalyl illegal it smells, and when it stinks...theres usally shit.

[UTdave]

already do that since I work 100% from home, internet, computers and equipment, claiming percentage mortgage for sq ft of house used and percentage of utilities. Please feel free to add to this list. Otherwise please be more vague in your next post

As an employee those deductions are limited to the amount in excess of 2% of your AGI (adjusted gross income) as a self employed individual that limit goes away. It sounds like from your description of the work you will have few deductions from it.

A note on the mortgage interest you were deducting before. If you are taking a home office deduction but are an employee of someone else don't take any mortgage interest to the home office. It should all be deductible on the schedule A without the 2% limit unless you have >1,000,000 of debt on the home. Therefore, if you deduct it on the 8829 (home office) then it flows into the misc. itemized deductions on the bottom of the sch A and is limited by 2% of your AGI.

On a different note how did you manage to get 35 paid days off? What a sweet gig it must have been while it lasted. Also, if I were you I'd try to negotiate more money out of them.

As to the Roth IRA that is not a tax deferred retirement account. In a Roth you pay tax now but you don't pay tax on the distributions. A traditional IRA you deduct it now and pay taxes on the distributions. If your young I would strongly reccomend a Roth because you don't ever have to pay taxes on the growth of the account. The drawback is if you make over a certain dollar amount you cannot do a Roth (sorry don't remember the exact figure).

[guermo]

Otherwise please be more vague in your next post

Whoah , sorry guy!

[UTdave]

thanks dave, that led me to this gem, which could help reduce my tax rate if i incorporate myself

How? If you incorporate you have to pay yourself a wage (still subject to FICA and MC to the corp) and then extra money coming out is non-deductible to the corp. If you're talking S-corp (which I think you are) it is unlikely to work. Here's why:
In an S-corp you have to pay yourself a reasonable wage and then all the money the corp earns in excess of that you can distribute to yourself and it is not subject to SE taxes (note here- you will count the net income of the corp as income to you regardless of whether you distribute it to yourself or not). The problem that you'll run into as a one man show is the reasonable wage part. How is anything less then the entire net income of the business reasonable when it is all earned entirely by your own efforts? It can work for a one man show in some circumstances if say capital invested is a "material income producing factor," but it doesn't sound like it is for you. Unfortunately, in your circumstances I don't think an S-corp will work.

edit:
It also can work for a single shareholder s-corp if you are making money off the effort of your employees, but you don't have any.

[Ireallyliketoski2]

35 paid days off, sounds like they finally smartened up. How about faking your own death, collecting the life insurance, and moving to Switzerland?

[ANON-505]

umm, maybe I'm the only one to point this out but....

while these forums do offer an unbelievable wealth of info...perhaps you should be contacting a tax accn't, business consultant, or financial advisor.

You've got it right though, dirtbags are usually a great resource when making business/tax decisions....right?

[Crinkle]

not sure, took it from Wikipedia (i know great resource ), it said that the dividens or distributions are not subject to self employement tax. These are items I'll look into. Still trying to figure out my rights and what possible leverage I have. but thanks

guermo, don't take it so personally, its a tough time right now and repeating what others posted and things i already know, aren't helping me.

lax, yeah fricking monday, damn right this stinks. I think they are trying it as a quick way of saving money, without thinking it through. And they are use to most people in the compnay, just rolling over and accepting their changes. As far as legal, I don't think I meet the criteria for being a contractor, as I comply to several of those 20 rules for determining a contractor vs employee.

IRLTS, yeah its a great gig, I have put my time in and have gained my vacation benefits just like everyone else in the company with the same time in. I was off by 2 days, its 8 paid holiday and 5 weeks vacation (total 32 paid days) faking my death, not a bad idea, family won't be thrilled though.

anon. this happened at the end of the day yesterday. I don't have an accountant yet, i have one calling me monday morning. Most people don't work the weekends in that business, yet ski-bum types are always here. So in the meantime i'll tap all the resources I can in an effort to make myself as informed as I can.

[UTdave]

not sure, took it from Wikipedia (i know great resource ), it said that the dividens or distributions are not subject to self employement tax.

Dividends from a corp are not subjct to SE taxes but they are not deductible to the corp. Therefore they are double taxed. That is worse than SE tax in many circumstances. In an S-corp you do avoid the SE tax on income in excess of your wage, but that is the only advantage of an S-Corp over an LLC. If you do end up on your own I'd form an LLC. PM me if you want to discuss this.

[ole2planker]

Dividends from a corp are not subjct to SE taxes but they are not deductible to the corp. Therefore they are double taxed. That is worse than SE tax in many circumstances. In an S-corp you do avoid the SE tax on income in excess of your wage, but that is the only advantage of an S-Corp over an LLC. If you do end up on your own I'd form an LLC. PM me if you want to discuss this.

Whoa, you always have to distinguish an S Corporation from a C Corporation. You are correct that dividends from a C Corporation are double taxed. This is not true for an S Corporation, however. An S Corporation is a pass-through entity; that is, the income isn't taxed at the corporate level, but passes through to the owner. S Corporation dividends/distributions are not subject to social security or medicare taxes. Some S Corporation shareholder-employees split their income between salary and distributions. Typically, they pay enough salary to fully qualify for social security and save medicare tax on the balance. In a service business with no employees and where capital is not a material income producing factor, the IRS views taking distributions rather than salary as aggressive. Also, if you are making more than the social security maximum and trying to maximize a retirement plan, you may want more salary.

Note that unless structured properly, distributions from a limited liability company are always subject to social security and medicare taxes.

[Crinkle]

awesome, i think. All things i'll bring up with my accountant on monday.

Has anyone else under gone the transition of same job duties as employee to contractor? How much more (percentage) do I have to negotiate just to make the same take home, without taking into consideration all the tax issues i can tweak later.
the time off lost + medical + match of 401K + old rate of pay= new rate? is this justifiable and fair?

[Shredgar]

If the IRS considers you self employed you become eligible for a SEP-IRA

"The total contribution to a SEP-IRA account is the lesser of 25% of income (20% for self-employed before self-employed tax credit is included) or $42,000 for 2005; thereafter, the amount is indexed for inflation."

The 2006 SEP IRA contribution cap is $44,000 = the opportunity to really sock it away & retire sooner to heli ski.

[Danno]

awesome, i think. All things i'll bring up with my accountant on monday.

Has anyone else under gone the transition of same job duties as employee to contractor? How much more (percentage) do I have to negotiate just to make the same take home, without taking into consideration all the tax issues i can tweak later.
the time off lost + medical + match of 401K + old rate of pay= new rate? is this justifiable and fair?

I have always heard estimates that benefits are usually around 50% of total pay. Years ago, I had an employer that wanted to make me permanent-salaried, and I wished to be temp-hourly (I wasn't going to stay long and they knew it, so the salary benefits weren't worth it). They were going to pay me $14/hour as a permanent emlpoyee, and instead paid me $20/hr as a temp. Hope that at least gives you some reference point.