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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: New job question Date: 11/25/2004 11:51 PM
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I have a question and would appreciate any help from the Fools here. DH is interviewing for a new position - it's a long term consulting position. He's a consultant now, but the new company apparently takes a much lower chunk of his hourly rate than his existing one.

Anyway, that's not the question. The new company offers him two pay options: 1) they pay him net, remit all his taxes, offer him healthcare benefits, and a 401(k) with 50% of first 6% match or 2) they give him $7 more an hour, but all tax remittance is our responsibility, his health insurance is his responsibility, and there is no 401(k).

So, in the table below, I've included 40 hours for 4 weeks at the two pay levels. I've added the 3% match to the lower as an increase. I've assumed $38 bi monthly for his premiums (that's same as mine) or the additional $51 adding him to my plan would cost for option 2. Finally, I've subtracted the lost tax benefit of the $14K 401(k) contribution if he takes option 2. I realize he can utilize a TIRA, but then loses the Roth option, so I've left it out. And, it's only $3K per year.

$45/hr $52/hr
Pay per month 7,200 8,320
3% 401-k match 216 0
Health Insurance (76) (102)
Lack of 401-k tax 0 (2,800) >assumes $14K contrib. (20% tax)
7,340 5,418


Without looking at any numbers, he just gut-feeling believes option 1 is better - less hassle with taxes, SS, etc. and the 401(k). After running the number, I think I agree.

Are we missing anything? If my calculations are correct, it appears it doesn't break even until he gets to a $19/hour differential. Seems odd.

I guess it could work if he set up a separate company and formed a SEP IRA?

TIA
3MM
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Author: Donna405 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43268 of 76418
Subject: Re: New job question Date: 11/26/2004 12:44 AM
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Remember, as a self-employed person, he will be responsible for all FICA taxes, i.e., a little over 15% of his gross.

Donna (who thinks, with the cost of health insurance, he would be better with option 2)

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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43269 of 76418
Subject: Re: New job question Date: 11/26/2004 4:11 AM
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who thinks, with the cost of health insurance, he would be better with option 2

I'm confused by this. I guess I wasn't clear. In option 1 he would pay his own insurance via the company - I'm estimating $38 per bi-monthly paycheck. In option 2, I'd add him to my insurance at work which would raise my premiums by $51 per bi-monthly paycheck.

I don't really think the insurance is the issue. I realize that the FICO, taxes, etc. would be paid by us directly in option 2, but since I'm a CPA, I have no problem dealing with this.

The real issue I'm thinking is the loss of the tax deductibility of his 401(k) contributions plus the 3% matching. We'd have only taxable accounts available to us, I believe. Unless the SEP IRA option would be available.

I'm just trying to check my math and make sure I'm not missing anything. Taxes, FICO, etc. will be the same in either case, just whether we write a check directly or it's subtracted from his checks before we get them.

thanks for your reply
3MM

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43270 of 76418
Subject: Re: New job question Date: 11/26/2004 9:59 AM
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Sounds like this is a choice between being an employee of the new company or an independent contractor. Usually this is actually not a choice, as there are IRS requirements both ways. An independent contractor has more freedom to select one's own hours.
If he is an employee, the employer actually pays half of that social security tax, whereas an independent contractor has to pay it all for themself.
The 401K isn't that big a deal as the independent contractor is entitled to put money into a SEP IRA or other retirement plan that is likely more than the amount allowed in the 401k, and the SEP IRA contribution is also tax-deferred.
The health insurance issue would swing me toward the employee option, option #1. This is expensive and it gets more expensive as you get older and inflation continues to rear its ugly head. In fact, that is a major factor that caused me to become an employee after some years as an independent contractor.

Best wishes, Chris

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43271 of 76418
Subject: Re: New job question Date: 11/26/2004 10:07 AM
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One more thing, DH does NOT have to set up a separate company to have a SEP IRA. He only has to have income from self-employment. He can even talk to the custodian of his existing IRA and add the SEP funds to the same account, after doing some paperwork to convert his existing IRA to a SEP. In the SEP he has more choices of options.
The $2800 figure for taxes not paid as an employee isn't real--because he can have a SEP, and also because the income going into the 401k is tax deferred, not tax free. You have to pay the tax later, when hopefully the tax rate paid will be less.

I'd still go for Option #1 because of the health insurance.

Best wishes, Chris

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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43272 of 76418
Subject: Re: New job question Date: 11/26/2004 11:35 AM
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I'd still go for Option #1 because of the health insurance.

crosenfield,

Thanks for the reply. Is the above due to the possibility of something happening to me and then he'd have to cover his own insurance? As I said, the difference would only be about $25 of going it on his name vs. adding him to my policy.

However, I did neglect to remember the employer portion of FICO. That's the missing piece I was looking for. And, it's not insubstantial.

The opportunity to put more into a SEP vs. the 401(k) is very attractive, but the additional FICO swings me to option 1.

thanks for the reply
3MM


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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43274 of 76418
Subject: Re: New job question Date: 11/26/2004 11:59 AM
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"Is the above due to the possibility of something happening to me and then he'd have to cover his own insurance? As I said, the difference would only be about $25 of going it on his name vs. adding him to my policy."

Partially. Since you are employed, and can put your husband on your insurance, the difference at present is indeed small. If you were to leave the work force and no longer had that option, you will find the rates for an individual trying to get health insurance are much higher. So his being an independent contractor serves to commit you to continuing to work even if your husband's employment actually makes enough work for both of you.

The extra FICO can indeed be a factor that swings the decision.
I've been happy with my decision to go back to being an employee. Less freedom in some respects, but I'm also accumulating a pension--which would never occur as an independant contractor, and there are also the little matters of sick time and vacation days, that don't appear in your calculations.

Best wishes, Chris


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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43278 of 76418
Subject: Re: New job question Date: 11/26/2004 3:06 PM
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I won't be leaving the workforce unless forced to. We are DINKS.

As far as the vacation, etc. this is still a contractor positon. No vacation or sick time per se. He gets paid when he works. If he takes a week off, no income. It's just a matter of which type of pay would be more beneficial.

thanks for your reply.

I think we'll go with option 1 and leave the bookkeeping to them.

3MM

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Author: SWEETMOCHA2000 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43284 of 76418
Subject: Re: New job question Date: 11/26/2004 6:08 PM
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they pay him net, remit all his taxes, offer him healthcare benefits, and a 401(k) with 50% of first 6% match
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

I would think that option 1 is best because your husband would get an employer match on his 401k. Thats free money :-)

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Author: AvramF Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43289 of 76418
Subject: Re: New job question Date: 11/26/2004 8:00 PM
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I think the W2 deal is better in this case.
Some things you do not include in your calculation is
... Employer share of Social Sequrity
... UIC and workers compensation

There is a third option I would like to mention.
There are business that provide employer of record services for people who would ordinarly be 1099 corp-to-corp.

The way these work is the employeer of record receives compensation and after charging a fee returns the money in the form of W2 wages and expences. They do all the paper work usually including billing.

I use such a relationship. My 401K controbution is 9% against my w2 pay plus a match that is payed as an expense from the total comp sent to my employer of record. Things like health insurance are payed pre tax as an expense against billing.

the company I use is named Solution Specialists
can be reached at SOSPECINC@CS.com

I am sure you could find other firms using internet searches like
"Consultant employeer record"

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Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43321 of 76418
Subject: Re: New job question Date: 11/28/2004 10:48 AM
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I've done contract work on and off so I've dealt with this issues as both a W2 and SE contractor. Have you looked into the substantial tax deductions you MAY receive as a SE employee?

A good deal of the SE Fica taxes could be offset by the extra tax deductions you can take as a SE employee. $45-$52 an hour is substantial, adding your income as DINKS puts you both in the upper middle class tax brackets. If you can deduct home office, computer hardware/software, internet connection fee, travel expenses, car depreciation etc. it could significantly effect your decision.

As already mentioned, the tax deduction advantages of a SE are usually greater than a W2 employee and can give you even a greater benefit. TMFPIXY has some good posts about this but I believe a SEP IRA is usually the best option to shield a great deal of SE employment income from taxes. If you and your husband are ones to save/invest a large portion of your income, then I would lean toward option II.

Another point not mentioned is whether or not he can change back and forth from option I and II. If you find out the one or the other is not working out due to new info, can and when can you switch over?

regards,

decath


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Author: saydiver Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43323 of 76418
Subject: Re: New job question Date: 11/28/2004 11:59 AM
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The employer side of the SE tax is tax deductible.

A self employed person can also set up a self employed 401K and be able to contribute more to their 401K than a SEP-IRA with an income of approx $100,000 a year. There is a little more paper work, but the tax advantage of being able to defer more money to your retirement plan makes it worth it.

Fidelity has some info on their web site comparing the two plans.

Overview Self Employed/Small Business Plans:
http://personal.fidelity.com/products/retirement/getstart/newacc/smallbizintro.shtml

Benefits of a Fidelity Self-Employed 401K:
http://personal.fidelity.com/products/retirement/getstart/newacc/keogh.shtml

Sue



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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43325 of 76418
Subject: Re: New job question Date: 11/28/2004 2:34 PM
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Thanks Decath and Saydiver,

With the new info you've both graciously provided, I'm now trying to determine if the increased potential of 401(k) contributions (and pay) offset the increased self-employment taxes and loss of 401(k) matching. This is making my head spin! I need a worksheet!

Decath, I did consider the possibility of other writeoffs, but I'm afraid we wouldn't realize much.

Home office - we don't have a separate space, nor is his primary place of business our house. He'd be working at the company, so I don't think we'd qualify.

Office equipment/computer - he'd be working on the computer at work. don't really anticipate any work from home.

Internet connection - Again he'd be working from work and my usage of the DSL for "fun" (Fool.com!) I think would negate this.

Travel - none anticipated.

Car depreciation - we only have one vehicle. He drops me off to and from work. On the odd day he has to work late and I don't, the $10 cab ride home for me saves on the 2nd car payment, insurance, personal property tax, and license and maintenance. :)

And, yes, as DINKs we get murdered by the taxman. And, if he gets this position, it'll only get worse - the lower amount is a 50% increase in his pay. (Of course, there are worse situations to be in, eh? :))

We do itemize, but with the mortgage just 11.7% of our existing gross, we just barely make it over the threshhold where it's more advantageous. What concerns me is that we are inching ever closer to AMT. This may put us over the top. I can't remember - does AMT negate the pluses of the 401(k)?

Like I said, I'm approaching Exorcist territory, here! (head spinning reference :))

Does anyone have a link to a tax calculator where I could do a comparison? All of the ones I'm finding are to estimate taxes owed for 2004 assuming mid-year timing. I'd just like one where I could input all the numbers from scratch and see what the estimate for the year are each way. Maybe my 2003 Trubotax has this. I'm going to check.

I really appreciate all your help and the added things for me to consider. Access to the knowledge of the posters on the Fool is invaluable.

3MM

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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43331 of 76418
Subject: Re: New job question Date: 11/28/2004 5:46 PM
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Decath and Saydiver,

Again, thanks for the suggestions for my calculations.

I've plugged the numbers into Turbotax 2004 estimator and what I found was, unless I can fudge the Schedule C with business expenses beyond just the 401(k) contributions, even contributing $41K would leave us paying MORE in taxes than going the W2 route. I was pretty amazed. Even though taxable income would be $18,500 lower, total taxes would be $3,675 higher. This assumes we even could make $41K in contributions each year, cash flow-wise.

Now, granted, as time goes on, we will end up with taxable investments that could swing the pendulum, since the opportunity of putting that money into tax deferred would reduce the tax bite from interest/gains taxes. But, we don't know how long this gig will even last.

So, at this point, I think we'll go the W2 route and keep our eye on it.

Again, thanks for your help. It really clarified my thinking on this and now I won't be wondering if we made the right decision.

3MM

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Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43332 of 76418
Subject: Re: New job question Date: 11/28/2004 6:08 PM
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3mm
Again, thanks for your help. It really clarified my thinking on this and now I won't be wondering if we made the right decision.


Sounds like your making a very informed and well researched decision.

Good luck and God Speed!

decath

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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43333 of 76418
Subject: Re: New job question Date: 11/28/2004 6:11 PM
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Sounds like your making a very informed and well researched decision.


heh heh.

Yes, well, either way the taxes about gave me apoplexy! :)

3MM

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43338 of 76418
Subject: Re: New job question Date: 11/28/2004 10:39 PM
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3muttsmom: "Decath, I did consider the possibility of other writeoffs, but I'm afraid we wouldn't realize much.

Home office - we don't have a separate space, nor is his primary place of business our house. He'd be working at the company, so I don't think we'd qualify.

Office equipment/computer - he'd be working on the computer at work. don't really anticipate any work from home.

Internet connection - Again he'd be working from work and my usage of the DSL for "fun" (Fool.com!) I think would negate this.

Travel - none anticipated."


Based on what little you have said, I tend to doubt that classifying your DH as an independent contractor is lawfully permissible to his employer. The IRS has a 20-part test, but lack of office, working only on company site, on company computer equipment, and with no other employers makes him sound like an employee!

See, e.g., http://www.t-tlaw.com/lr-02.htm ; http://www.peo7.com/htmFiles/IRS405.htm ; etc,

Regards, JAFO



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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43341 of 76418
Subject: Re: New job question Date: 11/29/2004 12:41 AM
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Thanks, JAFO.

Actually, he's being hired through a consulting firm. The office he'll be working at is the one where he's contracted to work.

Apparently, this is fairly common in IT. The guy who referred him has been working this way for years.

The 2 options were presented to him by the potential "employer", i.e. the consulting firm. We didn't go looking for them.

I think the ones who do this actually subcontract themselves out to the consulting firms. I suppose it's not that much different than a plumber or electrician. Though, many of those do have a homebase from which they "work".

3MM

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Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43342 of 76418
Subject: Re: New job question Date: 11/29/2004 8:40 AM
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jafo:
Based on what little you have said, I tend to doubt that classifying your DH as an independent contractor is lawfully permissible to his employer. The IRS has a 20-part test, but lack of office, working only on company site, on company computer equipment, and with no other employers makes him sound like an employee!


It can get troublesome. The "IT" contractors I've known and worked with target the restriction of working at more than one place more than anything. I guess that is because it is the most obvious way the IRS can detect you and the company if the relationship is not compliant.

The rules were put into place to protect the workers from unscrupulous businesses. Having a contractor instead of an employee usually saves the corporation money.

A contractor I've used for the past 4 years uses his tax deductions to the full extent, legally and ethically. He contracts for 3-5 companies every year and travels all around DFW. When he can, he negotiates telecommuting priveledges and is able to work on nights and weekends. Thus he is able to deduct travel, car expenses and home office space.

HIs wife and him also have a side business doing wedding videography/photography that they deduct that as well. He does most of the field work while his wife does the lab work during the day at home. THey have 3 kids so they don't have to pay for child care.

decath

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Author: freakydeac Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43487 of 76418
Subject: Re: New job question Date: 12/9/2004 4:37 PM
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If he is going to be an indep contractor, he will not be under Workers' Comp for that company. Might make a difference in your overall planning, because comp has disability benefits for work injuries. W/o it, you may need more disability insurance.
Deac

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