Contractor Now Moved To W2 Employee (advice needed!)

[dsp0725]

Howdy... Just got out of a meeting with the CEO that I consult for and I was notified that they are making me a W2 employee. The past several years they have paid my LLC S corp about $185k for consulting work (independant contractor). They are my main source of income at this time.

For the past 3 years or so I've been maxing out my Roth IRA, and solo401k (including employer contribution).

I'm a bit concerned with this news and change. I won't have the write off's and might not be able to stash away cash to my investment accounts. He told me not to overfund my retirment accounts for fear of locking up that cash. He tells me they are going to setup SEP/401k options for me, however, I don't think it'll be as big as my own contributions have been.

I'm 33, wife is 29.
No debt other than the house @ $296k, it's worth about $450k.
Roth & solo401k @ $183k.
Cash @ $41k

What's everyones thoughts on this situation, I'm a bit shocked and don't like the change at this time? I don't like to deviate from my plan. Was hoping to ride this wave for a few more years... then coast into ER. My knee jerk reaction is to just roll with it, and try to get a few new clients to keep my LLC S corp moving with revenue.

Maybe this is a sign that I need to build out more and get more consulting clients.

Thanks all!

 

[aja8888]

Maybe this is a sign that I need to build out more and get more consulting clients.

Thanks all!

There you go. Could be the IRS sees him as using you like an "employee" and he is making you one to cover his tail (he's not paying taxes on your behalf and 1/2 the SS cost). I was in you predicament as a individual contractor with one really one client for a few years. I ended up doing work for other clients and that got me out of that situation.

Do you use an office at his location on a routine basis?

 

[Texas Proud]

Laws are different....

But, do you have other clients?

Do you get assignments and deadlines and you just do the work to meet the deadline?

Do you get to say 'no, I do not want to do that work' and get away with it?


These are examples of someone in business for themselves... if he controls what work you do and when you do it, you more than likely should be a W-2 employee...

 

[dsp0725]

I pretty much use my home office but go to their office a couple days a week. Their W2 employees answer to me.

I don't have any other clients, but of course I could get some. I do some probono work for other firms.

I oversee their team and manage their clients. They also have me manage certain projects for their clients.

No, I don't really get to say "no i don't want to do that work".

 

[Aerides]

Are you being told or asked? And told as in "this or nothing"? Ask for time to consider the offer.

Might be a good time to have someone working the employment contract on your behalf, I'm sure there are folks who specialize in this sort of thing, an agent. You'll want to negotiate for continued WAH, for good benefits, etc. Do look at the healthcare angle, as that might prove to be quite a big chunk of savings for you.

 

[dsp0725]

I'm being told and don't really have a choice.
They are going to give me full medical, vision, and aflac.

My biggest concerns are write offs, fundings 401k's and the 35k I put in each year as an employer contribution.

 

[OldShooter]

Deciding whether a person is an independent contractor or a W-2 employee is not like deciding what color shirt to buy. The IRS has what they consider to be very strict criteria that determine the classification. ref https://www.irs.gov/businesses/smal...ependent-contractor-self-employed-or-employee and also https://www.dol.gov/oasam/programs/...ework/conference/staffing/9.1_contractors.htm

What has happened here is that your employer has determined that, according to the IRS rules, you must be classified as a W-2 employee. There can be severe penalties for misclassification. Possibly they were audited by the IRS and the IRS told them to reclassify you. Possibly they did some kind of internal review or there is a new person in HR who is making this determination.

The real world is that employee classification is a gray area. You might be able to go to your employer, inquire as to the reasons for the change in classification, and argue against it based on challenging those reasons. But almost all the risk in misclassifying an employee as an independent contractor falls on the employer, so you probably have a uphill battle and probably have low probability of winning.

 

[CardsFan]

Has there been any discussion about wages?

Typically, a contractor is paid significantly more than a W-2 worker. Benefits, ss payments and the ability to fire you a$$ without notice or reason, all fall in to the logic.

In any event, they cannot tell you that you MUST be a W-2 employee. But they can tell you that is the only option with them.

Based on your description of the work, I think they are rightly concerned that the Feds would consider you a direct employee, particularly if you are giving specific direction to direct employees. That's usually called a supervisor. Also, you have no other clients.

FWIW don't blame the company. They only trying to comply with employment laws.

 

[Senator]

You are right. No more business write-offs.

Actually, you can have some write-offs, and even lose money on your business that will offset the active income W2 taxes for a couple more years after the transition. But you cannot do it forever.

 

[pb4uski]

I pretty much use my home office but go to their office a couple days a week. Their W2 employees answer to me.

I don't have any other clients, but of course I could get some. I do some probono work for other firms.

I oversee their team and manage their clients. They also have me manage certain projects for their clients.

No, I don't really get to say "no i don't want to do that work".

From your responses you should be an employee.... not even a close call.

I've never heard of a company's employees reporting to an independent contractor..... do you do performance reports on those employees? make firing decisions? determine their bonuses and merit pay increases?

 

[dallas27]

Howdy... Just got out of a meeting with the CEO that I consult for and I was notified that they are making me a W2 employee. The past several years they have paid my LLC S corp about $185k for consulting work (independant contractor). They are my main source of income at this time.

For the past 3 years or so I've been maxing out my Roth IRA, and solo401k (including employer contribution).

I'm a bit concerned with this news and change. I won't have the write off's and might not be able to stash away cash to my investment accounts. He told me not to overfund my retirment accounts for fear of locking up that cash. He tells me they are going to setup SEP/401k options for me, however, I don't think it'll be as big as my own contributions have been.

I'm 33, wife is 29.
No debt other than the house @ $296k, it's worth about $450k.
Roth & solo401k @ $183k.
Cash @ $41k

What's everyones thoughts on this situation, I'm a bit shocked and don't like the change at this time? I don't like to deviate from my plan. Was hoping to ride this wave for a few more years... then coast into ER. My knee jerk reaction is to just roll with it, and try to get a few new clients to keep my LLC S corp moving with revenue.

Maybe this is a sign that I need to build out more and get more consulting clients.

Thanks all!

I would make it very clear the amount of difference in total savings/income that you project, and request he make you whole. Maybe he won't but i want him understanding clearly how much your compensation is being reduced. If he really wants to keep you around, he'll compensate you.

Oh, btw, they will now expect free overtime most likely. Factor that in.

 

[pb4uski]

I'm being told and don't really have a choice.
They are going to give me full medical, vision, and aflac.

My biggest concerns are write offs, fundings 401k's and the 35k I put in each year as an employer contribution.

It would be reasonable that you come out whole as far as total renumeration.

For now, let's assume that your rate per hour will be the same. They will now pay SS and medicare tax match so that is 7.65% that will not be coming out of your pocket.

Their medical insurance may be better and/or less costly that what you currently have but you'll have to compare them. Do they offer a 401k match?

The downsides are writeoffs and the amount of tax-deferred saving you can do so your tax bill will likely be higher. you might pitch themaking you whole for that but I don't see it happening.

 

[Luck_Club]

W2 after independence is a tough transition mentally as well as financially. You can keep the business open for 3 years while seeking new clients. Keep up a website and actively seek new clients.

I did a transition from independent to w2 for 13 months. It was a miserable 13 months. The reporting is what was bothering me. I still had 1 other income stream under the company, and actively tried to beef it up, thus not losing my generous tax benefits.

If they pay you the same $185K with benefits, and continue the work from home deal, it could be pretty good. If they cut you more than $35K for the benefits and pull the work at home, you will be miserable, and losing money.

 

[Texas Proud]

W2 after independence is a tough transition mentally as well as financially. You can keep the business open for 3 years while seeking new clients. Keep up a website and actively seek new clients.

I did a transition from independent to w2 for 13 months. It was a miserable 13 months. The reporting is what was bothering me. I still had 1 other income stream under the company, and actively tried to beef it up, thus not losing my generous tax benefits.

If they pay you the same $185K with benefits, and continue the work from home deal, it could be pretty good. If they cut you more than $35K for the benefits and pull the work at home, you will be miserable, and losing money.

I think he was wanting to put more money aside as a benefit instead of any deductions... and if there are no profits then he cannot put anything aside... the $185k is now W-2 and not included in company income...

 

[dsp0725]

Any idea why the CEO would advise me not to over-invest? For fear of tying up my cash...?

 

[ivinsfan]

Any idea why the CEO would advise me not to over-invest? For fear of tying up my cash...?

Trying to make you feel better about going to W-2...

 

[pb4uski]

Any idea why the CEO would advise me not to over-invest? For fear of tying up my cash...?

From what you wrote it sounds to me like he was referring to the fact that other than a 72t that you can't access those reirement accounts without paying a 10% penalty until you are 59 1/2.... so if one wants to retire before 59 1/2 then they need to think about access to funds in addition to whether they "have enough".

 

[dsp0725]

From what you wrote it sounds to me like he was referring to the fact that other than a 72t that you can't access those reirement accounts without paying a 10% penalty until you are 59 1/2.... so if one wants to retire before 59 1/2 then they need to think about access to funds in addition to whether they "have enough".

Yeah that's a good point. The reasons I've been dumping so much cash into my RA's the past 3 years is because I was a bit late to the investing game and I wanted to take advantage of the tax benefits.

Now I'm questioning my plan... Maybe I should slow my roll & use traditional brokerage accounts. There's no early withdrawl penalty on those, right?

 

[pb4uski]

I think you are right to want to defer taxes.... I deferred at 28% and higher and am now doing Roth conversions in early retirement at ~7% so I have saved a lot. it is a matter of balance and depends on when you plan to retire. If you plan to reitre after 59 1/2 then no problem... but if you plan to retire earlier than that then you would want some diversity in the tax attributes of your retirement funds.

On brokerage accounts or taxable funds, the bad thing is there is no tax benefit from contributions.... however there areso no restrictions on withdrawals... also if invested in equities then qualified dividends and LTCG get taxed at preferential tax rates... as little as 0% for those whose total taxable income is in the 15% tax bracket or lower and generally at 15% for most other taxpayers (but at higher rates for some high income taxpayers).

 

[Texas Proud]

I think you are right to want to defer taxes.... I deferred at 28% and higher and am now doing Roth conversions in early retirement at ~7% so I have saved a lot. it is a matter of balance and depends on when you plan to retire. If you plan to reitre after 59 1/2 then no problem... but if you plan to retire earlier than that then you would want some diversity in the tax attributes of your retirement funds.

On brokerage accounts or taxable funds, the bad thing is there is no tax benefit from contributions.... however there areso no restrictions on withdrawals... also if invested in equities then qualified dividends and LTCG get taxed at preferential tax rates... as little as 0% for those whose total taxable income is in the 15% tax bracket or lower and generally at 15% for most other taxpayers (but at higher rates for some high income taxpayers).

There probably will be changes before OP needs to worry about this, but the ACA credit is a tax that is based on any level of 'income'....

IOW, I could do conversions or sale of funds and pay zero income tax, but my ACA credit is going down at just under 10% of whatever I do.... this means I do not have any zero bracket when it comes to my income....

 

[pb4uski]

I agree that one of the perils of ACA subsidies is less financial flexibility. In our case ACA credits were less valuable than the tax savings on Roth conversions so luckily I don't need to wade thoough ACA constraints.

 

[Brat]

Basically you meet the IRS definition of an employee. Since your client is your only client you, for all practical purposes, are stuck. What you can do is accept this reality but continually look to change your business model so that you are no longer dependent on one client. Form a LLC so that you have a corporate umbrella to work under.

My DH worked as a contractor doing project management. He usually had more than one client at a time and he certainly had several different clients over a year. He also worked for his own PC. If you want to continue as an independent contractor you need to work smart.

 

[johnhkc]

Howdy... Just got out of a meeting with the CEO that I consult for and I was notified that they are making me a W2 employee. The past several years they have paid my LLC S corp about $185k for consulting work (independant contractor). They are my main source of income at this time.

Maybe this is a sign that I need to build out more and get more consulting clients.

Thanks all!

I've been working as a Java software contractor for several years now but I always go through a recruiting company. As a result, my pay is significantly lower than what I think it could be. How do you go about finding clients?

 

[Brat]

Think about the companies you have worked for and their clients, try to get one relationship away from the recruiting company.

You need to investigate the pay for your skill set. There are resources on the internet to do that. The best way, if you know someone who is in compensation at the corporate level, is to ask them. Compensation specialists are typically members of a network where they share pay.