Salary, W-2, or contractor?

[SecondCor521]

Hi all,

Second poll on the same job opportunity.

They are willing to make me an employee, a W-2 contractor, or a straight (I guess this means 1099 contractor).

Salary is $X thousand per year with benefits (unknown what those are at this point).

W-2 contractor is 2/3 $X per hour.

1099 contractor is 0.72 x $X per hour.

Votes and comments welcome.

 

[W2R]

It's pretty hard to compare without knowing what you are comparing. So, you need to find out about the benefits, IMO. And then, you need to figure out what you would need to spend on health coverage, which depends on your health, and to make up for any pension.

Basically, you have a lot of homework to do!! Probably they have it figured so that all choices come out about equal for most people.

 

[bssc]

Our benefits are about 33% of our compensation including SS employer contribution, 33 days of vacation and holiday plus healthcare and 401(k) contribution. So, for me the 72% is too low, 88% would be the breakeven for me for being a 1099.

I would look at your opportunities the same way but just with the SS employer contribution, it looks like being a W-2 is better.

 

[CuppaJoe]

Do all three scenarios include overtime pay? I've seen some people regret becoming employees. And have even seen people quit and go to work as contractors, to get better pay. Some take the employee route for benefits, especially medical insurance. It's easier to quit if you are not an official employee, I've done that many times.

But all in all #1 may be your best choice.

 

[SecondCor521]

CuppaJoe, I don't know about overtime pay.

Forgot to also ask this. So far the volley has been thus:

I receive an email yesterday from the consulting firm guy asking if I'm available.
I email him back today saying I am, let's talk.
He calls me this afternoon and we chat on the phone for perhaps 45 minutes. We agree that he'll send me the job description. He volunteers that he'll include "the salary range".

His email on the latter point reads:

"In the meantime, what we can pay for this role is tops $X annually with benefits (salaried associate) or $Y/hr W-2 or $Z/hr Contractor. We’ll talk in the morning to see if there is a fit. Thanks [2Cor521]!"

Any comments on the significance of the numbers that he's throwing out? Interesting to me that he said "salary range" in the phone call then identifies the top of the range in the email.

From what I know of negotiating, they shouldn't throw out the max number as their first number. So either it really isn't the top or the guy I'm talking with isn't experienced.

Comments?

2Cor521

 

[W2R]

He may (gasp!) have told you an untruth when he said those were the max pay rates.

Hard to tell!

 

[samclem]

I'm a 1099 contractor. I don't know how the "W-2 contractor" thang works. I don't know how much you already know, so here are some thoughts.

- "Pros" of being an employee:
-- Non-pay benefits (any retirement plan, health care, etc)
-- Salary= fixed, steady, dependable amount per month
-- Company pays the "employer" side of SS and Medicare (Approx 7.5%)
-- Possible path to more responsibility/higher pay within the corporate structure (supervising/managing other employees)

- "Pros" of being a 1099 contractor:
-- You'll get paid for all hours you work.
-- You can have a solo 401K account (which allows you to put away a lot of money tax deferred)
-- Usually, you can say "no" to work if you've got other plans. This obviously depends on the situation, but generally it is understood that your time is your own.
-- Easier to scale-back hours if required (e.g f you want to semi-retire, etc). You don't have to formally renegotiate and become a part-time employee with reduced benefits, etc. Just informally tell the customer (and that's what the company will be to you--your customer), that you'll be available less often.
-- Generally a significantly higher hourly rate than a salaried person.
-- As a self-employed person, many of your costs may be business expenses and tax deductible.
-- You can develop multiple streams of income by working for several customers. There will probably be "noncompete" clauses in your agreement/contract with the company, but it may be possible to abide by those agreements while still doing work for other companies. Having multiple customers can offer a higher degree of security than depending on a single one.

- Cons of 1099 contractor:
-- You'l pay the self employment tax (which is the "employer's contribution" to SS and Medicare, about 7.5%. As this 7.5% appears to be approximately the difference between the "w-2 contractor" and "1099 contractor" hourly rates they quoted you, I guess it's possible that they pay these costs for W-2 employees.)
-- You'll need to keep good records. Often, if travel is required, you'll have to pay for it out of your own pocket (airfare, hotel etc) and then file a claim with the customer for re-reimbursement. Then, at the end of the year, the company will report just one number to the IRS: and every nickel they paid you for any reason will be in that number. The IRS assumes this entire amount is income to you, and you have to keep records and report on all your travel expenses so that you can show that they were business expenses, not taxable income. In practice, this is isn't hard, since you needed to have all those records anyway in order to bill your customer for the expenses.
--- BTW, if you do your travel arrangements this way, you'll get all the airline frequent flier miles and any hotel loyalty program points (they won't go to the company). In addition, if you get cash back on your credit card, those rebates for the airfares and other travel expenses will all come to you.

 

[Moemg]

I also worked as 1099 contractor and the extra I made was eaten up by having to use an accountant to figure out the SS & medicare . As SamClean says you need to keep great records so you can deduct costs to lessen your tax bill . I'd go with salary anyday .

 

[Marquette]

If you can pick up your own benefits cheaply, 1099. Otherwise, maybe W-2 hourly if you can join their group plan.

If you're going 1099, establish an LLC or S-corp, get an umbrella and general liability and possibly E&O insurance.

For salaried, take the salary + bonus + company match on 401(k) / number of hours you reasonably expect to work and see how it stacks up.

"job security" should not be a factor with any of the above choices.

 

[socca]

Something smells fishy. The IRS may (eventually) be very interested if the hiring company is hiring contractors and treating them like employees. The hiring company should know better.

There are lots of good books on the consulting / contracting biz. Check out your library, amazon.com, or nolo.com.

 

[Marquette]

Something smells fishy. The IRS may (eventually) be very interested if the hiring company is hiring contractors and treating them like employees. The hiring company should know better.

Very good point... I've seen an arrangement a lot around here where a consulting company would prefer to bring someone on salary or W-2 hourly but will do a 1099 if needed. In all cases, you're being placed at their client's site as a contractor representing the consulting company.

If that's not the case, well, a lot of companies have been burned by treating their contractors like employees.

 

[Kronk]

I went through the calculations myself last year. I opted for 1099, and haven't regretted it yet.

Firstly, you'll run into some fixed costs for going 1099. I became an S-Corp, so that could run you from a couple hundred bucks (internet) to maybe $800 (lawyer). Accounting fees will run me $1,000-$1,200 per year.

For me, the biggest thing was the solo 401k with profit sharing. I'm giving myself a salary of $72k per year with 25% match from the corporation. So my personal 401k is limited to $15,500 per year, and then I get $18,000 per year as profit sharing from the corporation. So that's $33,500 per year into my 401k, hosted by Fidelity. The remainder of the money comes to me in distributions.

Paperwork is kind of a pain, since I do that myself. I have to do my 2nd quarter 941 form in the next few days (and, irritatingly, a lot of stuff is on my computer whose power supply just went poof). If you don't want to do it entirely yourself, there are programs to help you out (~$20/month), or you could hire a payroll service, which for me would be on the order of $50/month. I used Quicken's online payroll service 3-month free trial to help me get started, then dropped that before the charges kicked in.

The real numbers do matter, though. Take $100k salary, $67/hr W2, $72/hr 1099. The overhead of payroll, accounting, employer payroll taxes is going to eat that $5 premium up quickly. You might still end up ahead if you plan on maxxing out the 401k. If you're at $150k, $100/hr W2, $108/hr 1099, you'd see more of a difference. Either way, the 1099 premium is fairly small. My premium is $7/hr, and that was enough to be worthwhile for me.

Salaried vs contractor is a whole 'nother barrel of fish. And that depends highly on the benefit package.

 

[ziggy29]

I'd like to know how many hours a week you could expect to w*rk on straight salary.

 

[DallasGuy]

I was a contract worker for the last 14 years (I just retired again 2 weeks ago after my last contract ended). Before that I was an employee for 14 years. I preferrred being a W-2 employee for reasons other than financial. I got tired of being an employee because even though it had more stability I got bored after a few years and always felt trapped. That was solved for me when I got laid off in '94. At that point it gave me an excellent chance to try contracting. The choice at that point was either work as a W-2 contractor or a 1099 contractor. I chose the W-2 contractor route simply because it's easier. You don't have to set up a corporation and work with an accountant, etc. From what I've heard, you can probably come out better as a 1099 contractor though...it's just more work. I just didn't want to deal with the extra hassle of all the paperwork and record keeping that goes along with being a 1099 contractor. Some other reasons I chose to go the W-2 route was that I could join the group health plan through the company I was working for. I had to pay the full cost but it was at a group rate. If you work on a 1099 basis you'll probably have to get an individual health insurance plan and if you have any pre-existing conditions, you're screwed. Also, the cost will probably be higher than a group rate. Also as a W-2 employee, I could get other benefits like dental, LTD and 401k from the company I was contracting through.

 

[SecondCor521]

I found an overview of their benefits package online last night. It seems pretty complete: medical/dental/vision, EAP, health and dependent care reimbursement plans, 17 days vacation, group term life and AD&D, additional group life insurance if I want it, short and long term disability, "401(k) profit sharing" plan, possibility of stock options, plus a few other miscellaneous benefits that don't matter much to me but are a little bit nice.

One other consideration to throw out there is that my child support is based on my "income", which would probably be my salary or my W-2/1099 gross. I am in the middle of adjusting my child support (my ex got a job making probably twice what she stipulated to when we divorced and I was/am unemployed), so while I don't want to cut off my nose to spite my face (I think that's the expression), it's something to consider.

2Cor521

 

[SecondCor521]

Forgot to reply to a few things.

@socca, you're right, really it should be one way or the other. I took a look at the IRS website, and from what I know of this job it really is sort of a gray area, but it sounds more like an employee situation than contractor. The HR guy did say that since the contract was 12 months plus, that was what allowed them to offer the employee option.

@kronk, I'd probably do it all myself. I'm a pretty hard-core DIY'er, and it's just paperwork. The notion of having a much higher 401(k) contribution is pretty appealing, since at the numbers we're talking about I should be able to save quite a bit. I think the filing fees for a single-member LLC (probably a decent choice in my state) is about $150.

2Cor521

 

[SecondCor521]

One more:

@samclem, I haven't discussed specifics with this company, but at my last company I was a "W-2 contractor" and the company did pay the employer's half of SS/Medicare. I suspect that in this case that is the main difference between "W-2 contractor" and "1099 contractor" in terms of compensation.

2Cor521

 

[samclem]

Also, depending on the situation you might not need to establish either an LLC or Chapter S Corp. Some guys use the corporate structure to get a few tax advantages (e.g. having the corp buy a company car, etc), but I think most people go this route if they are exposed to liability risks. Liability isn't a factor in my line of work, and the tax angles seem mostly to be a way for guys to spend a lot of money on cars and offices that they rationalize as a business expense. In short, spending a dollar and feeling smart for getting a dime back in tax "savings." I'm a lot happier and way ahead financially just filing for my mileage at the government rate and driving a POS car, taking the home office deduction and not renting office space, etc. It might be different if I needed to impress clients with a fine car, but I don't. The paperwork hassle climbs a lot if you incorporate, and those who have done it in my line of work have come to regret it. YMMV, but KISS is good.

 

[socca]

...at my last company I was a "W-2 contractor" and the company did pay the employer's half of SS/Medicare. I suspect that in this case that is the main difference between "W-2 contractor" and "1099 contractor" in terms of compensation.

If you're an employee (getting a W-2), then your employer must pay the employer's half of SS/Medicare - no choice here. If you're a W-2 contractor, then your employer is the bodyshop who is marketing your services and pocketing the difference between your salary/benefits and whatever they're charging the client for your labor. If you're a 1099 contractor, there's no middleman (or woman) - you directly bill the client. This is very basic stuff - there's much more you need to know - I'm just sending it along FYI.