Self Employment/Contract Labor

[Timothy]

I'm looking in several areas for work, one of which is working on a contract either through an agency here in the Northeast or directly for an employer.  Whether it eventually moves into a permanent position is not that important for me.  Contract work has an appeal in that I don't have to worry about yearly appraisals from unqualified supervision or needless goals that only serve to convince the corporate boneheads that I'm "driven" by my career advancement.  Some may have noticed that I'm not much of a people person!   

Anyway, my question is about taxes, Social Security and self employment paperwork that needs to be filed quarterly or by the agency.  If anyone has some experience in this regard, feel free to post some comments or PM me to begin a dialogue.

Thanks in advance.

[Pathfinder]

I have run consulting organizations, as well as am currently in the independent consultant business, so maybe I can help.

There are a couple of kinds of "contract" work.

One is called "W-2", and essentially you are an hourly employee usually with limited access to benefits i.e., insurance benefits but no paid holidays; each employer is different). If you're working through an agency, this is often how they will set it up. They handle all tax reporting and typically pay less for a true contract employee. But, the client has no responsibility to you and can cut you in a heartbeat just like the other type of contract people. The work tends to be a little more open ended, although the scope should be defined in a Statement of Work.

A true contract employee is often referred to as a 1099, as you get a 1099 at the end of the year, not a W-2. In this scenario, you are solely responsible for all of the tax reporting - state and Federal - and do not have access to benefits. Also, you are not obligated to do anything not specified in the contract, else the company has violated the contract. About a dozen years ago, Microsoft got into a HUGE amount of trouble for treating contract people like employees, and ended up making benefits available to the original batch. It's one of the reasons everyone is so touchy about what the contract says.

1099's typically also have to provide some form of insurance coverage, including worker' comp and professional liability. This is why so many 1099's still go through some agency so the agency covers them. But 1099's also tend to get paid better than W-2s because you have to do all of the tax collecting and reporting - or hire an accountant to do it for you.

Is there something for you I missed, something you had a more specific question on?

[Timothy]

Path, you've shed a lot of light on the subject.  Thank you!

I'm meeting with an agency on Tuesday, next.  What sort of questions do I need to ask in order to address the issues you've mentioned?  

I'm kind of thinking I'd prefer to have someone else handle the tax issues but I also need to make a minimum hourly rate to remain somewhat solvent should I have to purchase insurance for myself.  Remember, MA is the only state that requires it's citizenry to have health insurance.  My wife is disabled so she's covered by Medicare but I need something or the state will penalize me for not having a health plan.

I'm perfectly capable and have enough knowledge to handle the IRS issues.  I've done my own taxes for 38 of the 39 years I've been in the workforce!  It's the rest of the crap that has me worried.

[TAB]

something else that is very important, it can be very hard to get a loan as a 1099 employee.  for a home loan for example you can't do a fha.   The house we just bought is a prime example of this, both the wife and I get 1099.  It took forever to get approved.( then there was the ammount out in loans for my company, but thats another story)

Also make sure that your job really does fall under the 1099 laws( both fed and state) and its not a employer trying to pass on some liabilty or avoiding paying some taxs.  Both can come back to bite you big time.



edit, I almost forgot, there are laws about who provides what as far as tools/cars goes with these too.  Once again make sure you check both state and federal laws here.  Lots of sleazy people out there will try to make you a 1099, when the law say s you must be a w2.

[Pathfinder]

Tim -

The questions are really pretty straight-forward.

1. What is the nature of the employment - full-time, W-2 or 1099. Depending on the industry, they may have other terms for these, these are the terms in IT I am familiar with.

2. If full-time, no worries. Doubtful, since this is an agency though.

If W-2, ask about access to benefits (esp. important in MA). Next up is the cost of said benefits, they should have a rate schedule for you to look at or keep. As I mentioned, some companies do not offer any W-2 benefits, they only take on the taxation responsibilities. If it' a MA agency, they should understand the interest in benes.

If 1099, basically you need to know about any additional requirements the agency has for 1099 employees, such as the insurance I noted. And, I would still sit with an accountant for an hour, esp. in Taxachusetts, to make sure you have all of the employment tax angles covered. Not needed if you're W-2 as the agency takes all of that on.

If they offer an option, ask about the rate difference between W-2 and 1099. Typically, it's about 10% in IT, YMMV.

Do not ask about the rate they are getting for your services. They won't tell you and it will annoy them. 

[Sponsor]

[blackwolfe]

I have seen the term full time mentioned in this thread a couple of times.  Make sure you find out the applicable definition of "full time"  My daughter recently took a "full time" job that that is only about 32-34 hours a week.  When she interviewed, she was told the job was full time, and she assumed 40 hours per week, and it wasn't until after she started that she was told that employers definition of full time.  Years ago, I took a job with a school system as a driver and was told the job was full time.  That definition turned out to mean that I drive every day, but it only ended up being about 5 hours per day.
At my current employment full time was recently reduced from a 5 day, 40 hour week to a 38 hour, 4 day week for many of the department.  Those that could not reduce the operations to a 4 day week, still only work 38 hours.

[WatchManUSA]

Over the past couple of years I worked several 1099 job but all of them have been through a consulting firm.  The consulting firm takes a cut of the hourly rate and they provide professional liability coverage.  I get paid from the consulting firm.  I send them my hours once a week and I bill them every two weeks.  The consulting firm bills the client and then pays me.  Payments can be delayed if the client is slow to pay.

The consulting company pays me and I'm a 1099 contractor.  I'm responsible for federal income tax, the self-employment tax (social security tax times 2 plus Medicare), and then there is state taxes if you have them.   I take every check and immediately take out the taxes and put in a reserve account.  Then, once a quarter I write checks to pay the estimated tax to the feds and state.

The IRS has good documentation on what you need to do and formulas for figuring out the amount to withhold.

A little advice, don't forget about saving for retirement.  I have set up a 401K or something similar and I pay into that as well.  I also registered a company name with the state.  I set up a business account and pay my business expenses out of that.  I am paid using my business name.  This year I had to buy a new a computer so I can depreciate that on my taxes.  I'm going to expense on my taxes a good portion of my transportation and parking to and from the client because my place of business is my home.

[Pathfinder]

Blackwolfe and WatchMan both bring up good points.

1. Make sure they define what they mean by "full time" if they offer it. Salaried is another term you need their definition so you know what to expect. It's unusual in IT, but some companies will call it full-time and you only can work 30-35 hours, and they have rules that you must work 40 per week to even be eligible for benefits. All of the IT opportunities I've applied for are 40 hour minimum so it's not an issue for me.

2. Make damn sure your pay is NOT contingent upon them getting paid by the client. The deal is between you and the agency, not with the client. Billing frequency is another thing to get worked out ahead of time. They will want a long pay cycle, you want to bill them every week if possible, every 2 if not, semi-monthly at worst. Some will want you to wait and bill a month at a time, and then take a month to pay you.

Odds are you will be signing their form/agreement/contract, so read it over well, have a lawyer friend check it over so you know absolutely what they are hanging on you.

[Timothy]

Thanks all, once again a wealth of information from DRTV.

I have no intention of signing anything on Tuesday.  I plan to bring everything home and review it and make a decision with my family first.

This company is a huge agency and I don't want to waste their time.  I don't plan on traveling and I'm also not willing to travel more than an hour commute.  In addition, working in the metro Boston area is out of the question.  It limits my possibilities but I'll be firm on that one. 

I sent her an email asking most of these questions already.  If her response is negative, I'll pass on the appointment.

[Timothy]

The appointment is still on.  She answered all of my immediate concerns.  So far, it's a W2 arrangement with possible benefits available.  I've started a list of other questions that I have to address during my sit down tomorrow.

Thanks again guys...here's the link to the agency if anyone has any interest or knowledge of their policies.

tim

www.oxfordcorp.com