I could use some help (contract vs employee)

[L7]

There's tons of good advice here and lots more knowledge of your tax laws then I have but I do have one point. Stop looking at it purely as what it costs you. You need to look at their overall employee burden to have you as an employee. So calculate in the 401 payments they make, health plan payments, 35 paid days off a year and then try to figure out how many sleep assessments you are making in a year and put a dollar value of what it costs them per study. You may be pretty surprised at what that cost is. From there you have more of a footing to approach what they should pay you for each study. They want to save money. There is probably lots of room in between them saving money and you doing nearly as well or better than you are now. As a contractor you could rationalize some auto expenses, hire your kids to clean your office and funnel that into a college fund, generally get creative.

Of course as someone mentioned as a contractor you should be able to do work for other companies so start hustling up some of that work and maybe get yourself in the position to demand more or work more with someone else that may pay better.

The arbitrary and instant switch to contract sure wouldn't fly here. They would have to give you 8 weeks notice OR pay you 8 weeks severance in lieu of notice and then contract work would begin. Of course the health care isn't so much an issue here but down there it is huge. It's hard to believe there would be no laws in place to protect workers from exactly this sort of shit.

[UTdave]

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.

If you'd read my earlier post I did.

[Big Blue]

One more thing to consider: Unemployment insurance. If they do end up laying you off at some point you wouldn't have UI as a contract employee, right?

[mrw]

As I see it, your 3 greatest losses are (1) paid vacation and sick leave,(2) matching 401 plan, (3) now having to pony up full boat on Social Security Tax and Medicare. I highly doubt that an increase of $4. per study will offset these losses. This leads me to believe that the registration issue is a smoke screen for some heavy cost cutting measures. I may have missed this but are you the only one company wide who is being turned into an IC?

It seems to me that you have some serious negotiations ahead of you and I'm guessing their flexibility or lack there of will determine the overall health of your position.

For what it's worth, I have worked as an independent contractor most of my life. Short of the lack of paid medical insurance, it is not a bad life but very definitely no where near as good as you had it. Push them for as much as you can get now. and then revisit the situation annually.

Good luck and kindly post a follow up.

[Crinkle]

thanks, can anyone clarrify the tax liability increase of self employment vs employment

I found this

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.

but after doing the calucation on my last paycheck, I am already paying 13.07% right now??? edit: this is wrong, I am not taking into consideration the money that comes out pre-tax. so somewhere more around 10% still doesn't make sense, unless federal comes out first

I am currently preparing a renegotiation email taking in consideration, my loss of vacation time, increase tax liablitiy (which might not be correct at 7.65% additional than I pay right now), insurance, and employee match, coming to a loss, the tune of 11k vs my current pay, which makes me very sad in the pants.

[mrw]

If I remember correctly, The % comes off of your adjusted gross. It is by far a screwing when compared to employee status. I have been using an accountant for years so I am fuzzy as to the exact %.

[shamrockpow]

In my old job we had a bunch of former employees that came back as consultants. They made anywhere from 50-60% more on an hourly basis than when they were employees:
So $50,000 per year employee at 2000 hours is $25/hour ---->>> $37.50+ per hour as a consultant

Doesn't really matter whether you are remote or in the home office, the corp. has a lot of overhead expenses tied into you as a full timer. Some large portion of what they lop off should be yours...

[UTdave]

unless federal comes out first They do not

I am currently preparing a renegotiation email taking in consideration, my loss of vacation time, increase tax liablitiy (which might not be correct at 7.65% additional than I pay right now), insurance, and employee match, coming to a loss, the tune of 11k vs my current pay, which makes me very sad in the pants.

Your new SE tax will be calculated as follows:
Gross income-business expenses (including home office, supplies, any auto and others) = SE income from business
this means that it will be calculated after your business expenses when as an employee it is calculated ignoring any business expenses that you may have and are not reimbursed for (note - if you are reimbursed for them under an accountable plan they are not taxed to you at all).


You then calculate the SE tax on that net SE income which is 15.3% on the first 94,200 (in 2006) then 2.9% on the amount over that.

You then get to deduct 1/2 of the SE tax for purposes of coming up with your taxable income for INCOME taxes.


In reality the change in taxes will be less than 7.65%, but I would negotiate from the 7.65% figure because 1) it is easier to understand and 2) it is to your benefit if they accept it that way. You're real loss is in benefits and paid time off. I'd still argue employee status with them because they can't just ignore the 20 factors rules and say you're not an employee if you really are. Good luck.

[Dside11-11]

Didn't read it all, but I think I can sum it up pretty quickly.

Fuck it dude. It's fun to be on your own. It's like killing your own meat. Plus, you are always free to indulge other opportunities. Don't worry about it.

[Crinkle]

yeah i won't mind as long as I am paid accordingly

[climb2ski]

hang in there...

[smitchell333]

Many good points in here.

There are many different ways you can structure a company and try to minimize your tax impact - for example pay your self a salary for a smaller but reasonable amount and pay the rest as dividend/profits and you'll avoid some of the self-employment tax - consult an accountant.

The gist of the matter is that the company is cutting many costs and probably not compensating you for your reduced benefits (not unless you're doing a lot of these studies @ $4 addnl)

I believe many companies have overhead in the range of 30%-40% of the salary cost.

You're basic net reduction in effective income/value can be calculated by adding up:

- 401 Match - 25% of your contributions
- Health Insurance cost
- Self Insurance - Somewhere on the order of 7% of your salary/wages/income
- Any re-imbursement of expenses (less the tax savings @ your tax rate when you'll write it off your taxes)
- Paid vacation days and sick days.

Add all this up and divide by how many studies you're doing per period and thats how much you should be paid to BREAK EVEN.

I think Shamrockpow is right that you should be making 50% more to accomodate for these things.

[jrbd]

I've been a contractor through an S-corporation for a few years now. The difference between using the corp and doing direct contracting seemed to come to about 3% of the difference between what I bill and what the S-corp pays me (which is about 60% of the billing rate). The whole difference is due to reducing the Social Security and Medicare taxes (the 15.3% thing) on the last 40%, minus some overhead (workmen's comp, unemployment taxes). My wife and I already had the S-corp from a previous business, and she does all the accounting and taxes already, so that wasn't a big deal really. Overall it's been worth it for us, but if we'd had to form the corporation when this started it probably wouldn't have been worth it (with legal fees, extra annual license-style taxes in the $150 range for the corp, having to file extra tax returns, etc.). Everybody else that's working with me under the same terms has just gone with direct contracting to minimize the hassle and overhead.

One advantage of the S-corp is that we can deduct our health insurance costs (which are done through the corp). I think I have an IRA also, but my wife does the accounting and she's probably not telling me everything (she just gives me checks to sign every two weeks, then takes them back ).

Good luck...the big decision is whether you're still better off with this job than you would be if you got a different one. If the answer is "no", then you have more room to negotiate your rate. In my experience, every job change has turned out positive for one reason or another; don't be afraid to jump if you don't like the way you're being treated. (note to self: need to quit current job and hike/ski more...)

[Crinkle]

It has been a busy few days here, lots of math, research and frustration. My company agreed to keep me on for another pay period to give me time to prepare. The rate negotiation has yet to take place, sometime tomorrow I have been told. The reasons are legit and out of necessity, it would cost them thousands to register in colorado as a Sub-chapter S corp and pay taxes in CO for shareholders. So I am under the impression they are going to work with me on this. I have the retirement finacial advisor thing on lock down, probably for the best, the guy rocks for a lot of people I know. The accounting thing is slowly coming around and no conversation yet, but hopefully any minute now, people are busy when you need them.

I was told by a friend in the independent business that it would be in my best interest to register as a "sole proprietorship" for tax reasons, so far it looks right, no other employees. i am my wife's medical so i won't deduct health care costs. but what a pain in the ass

jrbd, could you elaborate on the 60/40 thing. Kinda confused me. where is the 40% going? dividens?

[smitchell333]

jrbd, could you elaborate on the 60/40 thing. Kinda confused me. where is the 40% going? dividens?

The 60/40 thing he's referring to is a way to try to reduce the self employment tax (Soc Sec and Medicare = approx 15%). It doesnt have to be 60/40 - the key is paying an "appropriate" salary.

To illustrate:
If you make $100K in salary - you'll owe $15K in Self Employ tax.

If instead you pay yourself $50K salary and $50K in profits(or technically I think its called "distributions") you'll pay $50K*15%= $7.5K.

Talk to an accountant - they can explain and help you pile through this and other tax reduction techniques.

[Crinkle]

that is what i thought he was refering to, but without the clarrification. thanks for the heads up

[Crinkle]

update: so far this blow's goats. the stress is getting to me, I am going skiing tomorrow at Loveland and getting my pass.

I getting screwed from the inside. I did the math to figure out what it costs them to pay me per study, guess what? its less than they are offering as a contractor, what a raw deal. So far I have been quoted 2 different numbers, unofficial of course. One is the cost determined by the CFO and the other is the cost determined by the department head who it already has been determined, has bad math skills. Luckily my direct boss is on my side and helping me from the inside. Now that I have my numbers straight, they don't lie, they are shorting me big time.

[Buster Highmen]

What blew in the contracting world for me was health care. Those $300 copays drove me back to the ft world.

Anyway, your deal just sucks. Can you shop around for another option ?

[UTdave]

One advantage of the S-corp is that we can deduct our health insurance costs (which are done through the corp).

Careful there. The rules for more than 2% shareholders in an S-corp require you to include in the W-2 the health insurance and then deduct it on page 1 of the 1040 (you deduct it in the corp as wages, include in your W-2 and then deduct again on your 1040) it is a stupid round about way for doing it, but what do you expect from the Federal government?
Crinkle - good luck and find a good CPA near you to help you navigate this stuff.

[Crinkle]

Anyway, your deal just sucks. Can you shop around for another option ?

truthfully this is the best deal going, even with the pay cut I'll make out better than I can here or anywhere else that I heard of. I am the best in the dept at what I do (most productive, best accuracy/consistancy), but still taking a hit, compared to what others in my same position/years make. After the deal gets done, for better or worse, I'll start shopping to see if I can suppliment or do better. Luckily I have health care from my wife's company. It just has me in awe that the dept head thinks I am worth less as a contractor than I was as a employee.

Utd, I will definitely be hitting up the accoutant. For now its on hold, she is busy and it won't really effect this deal. I know what I am liable for now.