1099 vs W2

[egtuna]

I am an independent IT contractor currently making $95 per hour. My COBRA is about to expire, and I'm considering converting to W2 with the vendor (not W2 with the client). The rate offered by the vendor for W2 is $80 per hour, which includes health insurance ($1100 per month, which they pay 25%). Since my wife has 2 pre-existing conditions getting health insurance on my own would be ~$1500 per month.

The $95ph to $80ph rate reduction seems a bit high, but through research it's hard to find a common standard to apply when converting. I've seen that W2 should be current rate - 20%, but also have seen current rate - 7.65%. So confusing.

Anyone here have any advice?

Thanks.

[DjTj]

7.65% is just your share of the payroll taxes. Under the 1099, you are paying that yourself, but under a W2, your employer is paying that. So that is a clear benefit of the W2.

The 20% estimate is based on the cost of benefits. You should just estimate that based on the difference in your health care expenses (and any other benefits you get, like a 401k, paid vacation, or whatever).

[Corcaigh]

By going W2 do you also get other benefits .... vacation, public holidays, sick? Any retirement contribution?

Just looking at off time. To keep the math simple, say you get 26 days paid leave per year of any sort, i.e. 10% of the total weekdays, 26*8*80 is effectively what they are adding to your total pay that you wouldn't make as an independent.

[Skinz4Life12]

wow, that's pretty nice money. $95 an hour puts you just shy of 200k annually with 40 hour work weeks.

i can't really help with your original question though

[JMS]

20% is a standard markup for W-2 employees. It's actually a little better than standard as 30% is not uncommon and if you were direct to your client company their wrap rate could be higher than 200% for their own W-2 employees. Here benefited employee sitting next to you, making about half what you would take home as an hourly guy.

If you have a hard time finding insurance, setting aside your taxes, or a hard time with the monthly check or 30 day float, or setting aside your own retirement.. All are good reasons to go W-2... You pay more overhead, but it's a lot less of a hassle.

If you are a disciplined guy who can make a plan and follow through with it. The 1099 gig is much better. You will pay more social security + state unemployment = 11-12% more taxes.. ( remember you don't pay social security on your entire check, just the first 120k or so(don't quote me)... so for a guy making 200k you will make back 7% or so after you've maxed out that nut.... If you do go W-2 that's something to go after contractually in your rate.. )

But your deductions are bigger and you get more of them. Retirement savings is better. You can buy equipment and take classes related to your job and write them off. You can even travel for such and write them off. Let's see you can also write off mileage going to and from work. You can have a home office and write down part of your mortgage. differ income..

If you really want to get into it and optimize your situation even more, you can incorporate (S-corp, C-corp, LLC) and try to get them to pay you corp to corp rather than 1099. It limits your source companies exposure; and it even gives you more options with taxes and deductions.

---------- Post added September-19th-2012 at 12:52 PM ----------

7.65% is just your share of the payroll taxes. Under the 1099, you are paying that yourself, but under a W2, your employer is paying that. So that is a clear benefit of the W2.

But you don't pay social security on your entire nut when you are making 200k per year right? That's a question. Used to be you only paid SS on the first 70k, think it's 110k or so now.
So while you would pay an extra 7.65% as a 1099 only on the first 110k, after that you won't pay social security but as a W-2 unless you've negotiated for it; that money would be your employers, not yours.....

Let us review... W-2 employee pays about 15% to social security for first 110k. the employee pays half , the employer plays half. That along with state unemployment insurance makes up the 13% or so tax overhead associated with being a W-2 for the company.

Now if you are 1099, you are paying both shares of your social security, and your state unemployment.. But when you've reached your 110k cap, you get to keep the 7% overhead which the W-2 employee is still paying to the employer.

The real benefits in being 1099 are significant and found in the retirement and deductions which significantly lower your taxable income. If you aren't taking advantage of these go W-2. If you are into that kind of minutia; go 1099.

---------- Post added September-19th-2012 at 12:53 PM ----------

By going W2 do you also get other benefits .... vacation, public holidays, sick? Any retirement contribution?

At 20% overhead he won't get any of that. That really is a minimal overhead for a W-2 employee.