Wednesday, November 16, 2011

1099 vs W-2 pro/cons

We as recruiters have to know what a traveler/contractor expects in their pay package.  We need to have a handle on money to determine if our company is a good match in their search for work.  It often happens that someone will give me a rate of pay that sounds astronomical and totally out of my range of an offer.  My next question would then be, "are you a 1099 contractor?"  So many people who contract individually hear an hourly or yearly rate of pay and are dazzled by it, as anyone would be!  

My company hires all of our special education contractors as employees who will receive a W-2 for their earned taxable wages.  The portion of the pay package that is non-taxable if you are a "traveler" (housing and per diem) is not listed on the W-2, nor is it required to be reported by the IRS.

I found the article listed below and think it gives a fairly good representation of the differences between a 1099 contractor and a contractor who is actually hired and under the umbrella of a company as an employee:


For a frame of reference, a 1099 contractor making 115k a year, will end up owing roughly 30k in taxes for that year. That is with a home office, mortgage interest, mileage, sales tax, office/computer equipment deductions - pretty much standard fare for a contractor.

Yeah, you can possibly be more aggressive and try to write-off more stuff - but the IRS is cracking down on the self-employed. Even taking a home office deduction is a risk.

You pretty much need to set aside 30% of your earnings and give it to the IRS quarterly.

The best way (that I have found) to compare a given W-2 job with a 1099 gig is to calculate what the yearly take-home NET pay is for each. For contracting, assume that 33% is your tax liability. Then add on health care. For the W-2 job, go to salary.com and use their paycheck calculator to figure out what your bi-monthly paycheck will be - and multiply that by 26 (many people forget that there are 26 bi-monthly paychecks in a given 12 months - usually resulting in an extra paycheck in June and December).

Then you have to take into account stuff like any matching 401(k) the W-2 company has, etc. There are also holidays and vacation to consider. A contractor is NOT paid for holidays and gets no paid vacation.

Also, if you plan on getting a loan for anything (car, house, etc) it is a bitch and a half as a self-employed contractor. Many times you have to get a "stated income" loan, which have higher rates.

NOW, you can avoid some of that if you incorporate. You can pay yourself a small salary, and then issue yourself dividend or bonus checks to make up the difference, and it will reduce your tax liability.

Honestly, if you do decide to take a contracting job, you should see a CPA about how to structure things to be best in your favor

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