Contractor vs employee?

[redfox]

I have a half time employee position with good salary & benes, and am bored, but ok there. Just accepted a second half time position with good salary and no benes for a dynamic, young non-profit poised at the edge of growth - and I get to take it there!!! With an awesome board, of course.

This is definitely the professional challenge I've waited and prepped for, for quite some time now (like my whole career...). My hiring letter specifically states that the Board plans to work with me to make this a full time gig in the future - something I think we can do.

I have a choice of contractor or employee. Here are my thinking points & questions, and I would love some reflection. I'm also going to talk with some consultant friends about how they manage this, and probably a self-employment tax accountant.

1. I am concerned that my current position would be more in jeopardy if I take a second employee position, and that saying I am doing contract work in my off time would be accepted more. I think it would sound less threatening somehow to my current employer, as he also does some outside consulting.

2. I'll be working from home, and have heard - will confirm, but please inform me if you have info! - that the deductions for home based work is easier as a contractor. I am setting up in my weaving room until we can remodel my husband's unused art studio, which will take a few months.

3. Are self employment taxes a different bracket than if one is employed?

4. I live in an at-will state, so there is no inherent protection in being salaried vs. contract. I like the freedom as a contractor.

What else would be good for me to consider as I make this decision? I'd like to let the Board prez know by Monday. I am starting on 6 July, though have begun transition talks already, and had a welcome party thrown for me! Feels so nice...

Thanks!

[herbgeek]

I only know the answer to #3 and that is yes, self employment taxes are twice what you pay as an employee, because you are paying both halves. Here's the link to the IRS page on that: http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

#2, you'll need to check the IRS website for the actual rules, but you can deduct home office expenses as an employee if your employer requires it, not just because its more convenient for you. So in this case, I do think its "easier" to claim as a contractor. But I am not a lawyer, nor a tax attorney, and you need to work the numbers with your own professionals.

[HKPassey]

One thing that can be an advantage as a contractor is that you control the "how" and "when" of your work, otherwise the employer loses the ability to claim you as a contractor and becomes liable for all sorts of things. That seems to help soothe regular employers, as it eliminates the spectre of direct conflict of schedules for the most part.

I was given a similar choice by NRM, and I decided it made the best sense for them (I work very, very part time) and for me to go with the contract, and it's worked out well for me. We negotiated a rate that ensured that after paying the self-employment side of the taxes and some expenses, I'd still realize the offered base rate. The employer realizes a number of savings and benefits by contracting over employing, so don't be shy about pointing those out so you can work them in. You could see if they'd go for a trial period of whichever you choose, with the option to convert to the other if it seems it would work better after you've tried it a while.

I've never taken the home office deduction, because I don't have my computer in a room that's used for business and nothing else, and it also tends to catch the ole IRS eye. One downside for me is that I'm not covered by unemployment insurance, which, since I'm still 80% unemployed, is a concern. Still, no regrets doing it this way, and I love being part of a group working to better people's lives, which has a value in its own right.

[benhyr]

As a contractor,

You can deduct the percentage of your rent/mortgage and utilities that comprise your office. You can deduct the percentage of phone and internet that are used for office work. Document both of these and don't try and play games with deducting your entire mortgage.

You are responsible for the employer-side of FICA taxes (take your FICA and double it). There are no other bracket differences.

You have options to retain money in the business if you file as a C or S corp but taxes are easiest if you're an LLC or sole. Retaining money in the business does let you play with your tax bracket though (say you make $50k after taxes but need $30k, you can leave $20k in the business)

You also have options for contributing as both employee and employer to retirement accounts.

[redfox]

Awesome. Thanks all.

[iris lily]

DH has a home based business and we toyed with the idea of deductions for home related expenses, but for us, giving up the small breakfast room to exclusive business use as his office wasn't worth the small amount of money we saved in deductions. We don't have a mortgage, so all of the rest of it was minimal.

[Mangano's Gold]

As someone noted, the nature of how you do the work determines if you can be contractor. The IRS gives guidance on this, though it isn't always clear where individuals should fall. Misclassification isn't uncommon, particularly with IT workers.



You have options to retain money in the business if you file as a C or S corp but taxes are easiest if you're an LLC or sole. Retaining money in the business does let you play with your tax bracket though (say you make $50k after taxes but need $30k, you can leave $20k in the business).
Not to be too picky but this isn't really the case. S Corp income passes though to the owners, so you won't be able to delay recognition. For one-man shops, the tax issue here is what is "salary" and what is profit. Salaries are subject to SE tax, so people prefer to have a lower salary within the S Corp to avoid SE tax. It is a contentious area. The House Ways and Means Committee talked about "fixing" this and people went nuts, so nothing ever came of it. With a C Corp you can retain profits up to a point, but profits are still subject to the corporate tax each year. So you can really just defer the dividend, which would probably be taxed at somewhere between zero and fifteen percent.

[Polliwog]

The dictates of your work will determine to some extent whether you can act as an independent contractor. If you are going to set your own hours, determine where you physically work, maybe work for more than one company or person, you can probably act as an independent contractor (at least in California). I would be sure to have an Independent Contractors Agreement drawn up that spells out very clearly the parameters. It should also state that you are responsible for your own federal and state taxes as well as insurance.

I have been both and IC and an employee. Typically, you can and should charge more for your IC services, because you are responsible for the SE taxes. I actually prefer being an employee, but that is just me.

[redfox]

Thanks for all the advice - I really appreciate it! I decided to go the contractor route after my analysis. That may change once I raise the funds to make this a full time position... we'll see!

I'm about to head into the first staff meeting with my new staff!!! It's via phone as folks are spread all over the country - first time for me doing this. I am excited. Transitioning with the current ED is going well, as he lives close by me, so we started meeting in person yesterday. Then I head into my first 1-to-1 with the Board president.

What fun this is going to be! And lots of work.

[puglogic]

Redfox, no advice, just congratulations. How exciting!