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Contract work - 401k?
Old 11-17-2006, 09:07 AM   #1
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Contract work - 401k?

I have an interview for a contract-to-hire position next week. This would be my first contract position and I admittedly am ignorant about contracting. What are my retirement plan options as a contractor? Would I fall in the self-employed category?

Any help would be appreciated.
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Re: Contract work - 401k?
Old 11-17-2006, 09:15 AM   #2
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Re: Contract work - 401k?

Sometimes it is a gray area as to whether you are really an employee or an independant contractor. Assuming you are an independant contractor, they will not do any tax withholding for you and you will be responsible to pay estimated taxes and self employment tax.

As a self employed independant contractor, you can set up a retirement plan. If your goal is to put aside as much money pretax as possible, a solo 401k is a good choice. I believe Brewer's wife established such a plan for her business. There are more and more providers of such plans and you should be able to find one that doesn't cost you a whole lot. There are other options like a SEPP IRA as well.
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Re: Contract work - 401k?
Old 11-17-2006, 09:32 AM   #3
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Re: Contract work - 401k?

Quote:
Originally Posted by Martha
Sometimes it is a gray area as to whether you are really an employee or an independant contractor. Assuming you are an independant contractor, they will not do any tax withholding for you and you will be responsible to pay estimated taxes and self employment tax.

As a self employed independant contractor, you can set up a retirement plan. If your goal is to put aside as much money pretax as possible, a solo 401k is a good choice. I believe Brewer's wife established such a plan for her business. There are more and more providers of such plans and you should be able to find one that doesn't cost you a whole lot. There are other options like a SEPP IRA as well.
Martha, isn't the "grey area" clarified by whether you are considered a 1099 employee, or a W-2 employee, or does the offering of benefits cloud the picture??
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Re: Contract work - 401k?
Old 11-17-2006, 10:25 AM   #4
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Re: Contract work - 401k?

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Martha, isn't the "grey area" clarified by whether you are considered a 1099 employee, or a W-2 employee, or does the offering of benefits cloud the picture??
The IRS has a test to determine whether someone is an employee or an independent contractor. States have their own tests or follow the IRS test. Here is a link to the IRS test: www.irs.gov/pub/irs-pdf/p1779.pdf It all has to do with control over the person. Just because you get a 1099 instead of a W2 doesn't mean that you are an independent contractor from the IRS's point of view.

My BIL's employer was having financial trouble and quit withholding taxes and FICA. At year end the employer gave them all a 1099 and told them they were independent contractors. We cried foul--the employer should have withheld taxes and they were all really employees under the IRS factors.
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Re: Contract work - 401k?
Old 11-17-2006, 11:35 AM   #5
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Re: Contract work - 401k?

Quote:
Originally Posted by Martha
My BIL's employer was having financial trouble and quit withholding taxes and FICA. At year end the employer gave them all a 1099 and told them they were independent contractors. We cried foul--the employer should have withheld taxes and they were all really employees under the IRS factors.
I'm thinking the IRS spanked him pretty good........... Thanks for the link, I guess there's a lot more out there to know..........

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Re: Contract work - 401k?
Old 11-18-2006, 09:12 AM   #6
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Re: Contract work - 401k?

Quote:
Originally Posted by dunc0029
I have an interview for a contract-to-hire position next week. This would be my first contract position and I admittedly am ignorant about contracting. What are my retirement plan options as a contractor? Would I fall in the self-employed category?

Any help would be appreciated.
If you truly are an IC, then (as Martha noted) you'll be on the hook for both your share and the "employer's share" of SS/Medicare taxes...so be sure that your wage reflects an increase just for that.

Also, you do have a huge choice for retirement plan options. What is your approximate salary? If it's high enough, you could even look at doing your own pension plan. I'm helping my dad review new potential retirement plans, and it looks like the winning plan will allow him to put away $20k in a 401(k) and about $273k into a traditional pension (DBP) - annually. Granted, he's 65, so that's a big part of it...but even I will be able to sock away $24k in the pension and $15k in a 401(k).

If you're contract-to-hire and you anticipate being hired in just 1 year or so, you'd probably be better off with a solo 401(k)...unless your wage income will be above 220k, in which case the SEP IRA might be easier (and possibly cheaper, since the SEP IRA costs $0 to setup and run) than the solo 401(k).
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Re: Contract work - 401k?
Old 11-18-2006, 10:00 AM   #7
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Re: Contract work - 401k?

Other considerations: If you are an IC, you'l need to keep good track of your expenses. I do a lot of travelling, and at the end of the year I get a 1099 with a single dollar figure showing every penny paid to me by the company I contract with. This dollar figure includes all the $$ they paid me for travel, etc, so at tax time I have to show how much of that money was really reimbursement for travel expenses, incidental costs, etc.

There can be some tax benefits to being an IC, but it does require a little more work than being an employee.

For retirement, I'm stashing money in a solo 401K. I chose Fidelity, it is very straightforward to set one up. I wish Vanguard offered these so I could put all my holdings back under one roof.
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Re: Contract work - 401k?
Old 11-18-2006, 10:03 AM   #8
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Re: Contract work - 401k?

Good points samclem and MooreBonds. My inclination would be to stay away from a defined benefit plan until somewhere down the road. It is the plan where you can put away the greatest amount towards retirement, but there also is a lack of flexibility that can get get you in trouble on occasion. You could be required to make a contribution but not have enough money to do so.
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Re: Contract work - 401k?
Old 11-18-2006, 10:54 AM   #9
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Re: Contract work - 401k?

Quote:
Originally Posted by Martha
My inclination would be to stay away from a defined benefit plan until somewhere down the road. It is the plan where you can put away the greatest amount towards retirement, but there also is a lack of flexibility that can get get you in trouble on occasion. You could be required to make a contribution but not have enough money to do so.
Correct. I wouldn't suggest running into a DBP unless you have some stability in future earnings/revenue. However, you can cancel the DBP in the future (the longer you have it, the less scrutiny you have from the IRS), or (according to our DBP consultant) you can always adjust the pension plan metrics to require less funding (with some fees to your DBP actuary/consultant to redo the calcs and forms).
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Re: Contract work - 401k?
Old 11-19-2006, 11:19 AM   #10
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Re: Contract work - 401k?

Quote:
Originally Posted by MooreBonds
or (according to our DBP consultant) you can always adjust the pension plan metrics to require less funding (with some fees to your DBP actuary/consultant to redo the calcs and forms).
Yeah, I hear that was a really big hit with the auto, airline, & steel industries...
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Re: Contract work - 401k?
Old 11-19-2006, 03:56 PM   #11
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Re: Contract work - 401k?

Retirement plan options for self-employed (Kathy Kristof, 11/192006):

http://www.mercurynews.com/mld/mercu...s/16052258.htm

Also, you can deduct 100% of your health insurance premiums as an expense.

Kramer
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Re: Contract work - 401k?
Old 11-25-2006, 03:12 AM   #12
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Re: Contract work - 401k?

Quote:
Originally Posted by kramer
Retirement plan options for self-employed (Kathy Kristof, 11/192006):

http://www.mercurynews.com/mld/mercu...s/16052258.htm

Also, you can deduct 100% of your health insurance premiums as an expense.

Kramer
Does that mean you can deduct your unreimbursed health insurance costs in addition to the premiums? DW, who is a contractor got hit with a sizable unreimbursed medical bill this year.
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Re: Contract work - 401k?
Old 11-25-2006, 10:03 PM   #13
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Re: Contract work - 401k?

Hi Dave,

My understanding is that you can deduct your insurance premiums only (1040 line 29) and these are deductible only for income tax -- you still must pay your employment taxes on that money (so it is like an IRA or 401(k) deduction).

You can deduct actual medical expenses by itemizing on schedule A and include all costs in the "Medical and Dental Expenses" category above 7.5% of total income. Normally you can include your health insurance payments in this total, in addition to out-of-pocket costs, but you cannot include your premiums if you took the deduction above.

So the bottom line is that DW can deduct expenses and out-of-pocket costs only above 7.5% of AGI.

If you google this you will see lots of links.

Kramer
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