Pros and cons of being a subcontractor or on payroll?

Question

My boss suggested i become a subcontractor. How will that effect my taxes?

Answer 1

Generally, you will pay more taxes and you may not be eligible or unemployment. Not only does employers have to pay a share of the social security and medicare, they also have to pay state and federal unemployment taxes. If you are a contractor, the employer doesn't pay either of these.

Usually, an employer can not just make you a contractor. If you work a required shift, using the employers equipment and at their supervision, you are an employee.....period!

Answer 2

Becoming A Subcontractor

Answer 3

I'll put aside the question of whether you can legally be a subcontractor rather than a payroll employee.

Self-employed subcontractors have to pay self-employment tax, which means an extra 7.65% tax on your earnings.

You would also have to pay quarterly tax payments to the federal and state government, rather than having a certain amount of tax withheld from your paycheck and remitted by your employer. Ultimately you'd pay the same amount though. Just a convenience issue here.

The following have little or nothing to do with taxes, but still important food for thought:

Your earnings would not be reported to your state's unemployment division, which means you probably wouldn't be able to collect unemployment after this gig ends.

You wouldn't be covered under the company's workers compensation insurance policy. So if you get hurt while working, you're out of luck.

You wouldn't be covered under the company's health insurance plan, or get any other benefits for that matter. Instead, you could get on your spouse's benefits plans, assuming you have one. Or you could try to buy individual coverage, which is often expensive and sometimes even not available.

You also wouldn't be covered under a number of employment laws, including those prohibiting age/sex/race discrimination.

If the company was late paying your invoice, you would have to sue them for payment. But if a company is late paying its employees, a call to your state's department of labor is usually sufficient.

Answer 4

This Site Might Help You.

RE:
Pros and cons of being a subcontractor or on payroll?
My boss suggested i become a subcontractor. How will that effect my taxes?

Answer 5

A subcontractor has no employee benefits like vacation, sick days, health insurance. The subcontractor pays both the employee and the employer half of social security instead of just the employee half. The subcontractor is not covered for unemployment comp or workman's comp. The subcontractor has to file quarterly estimated tax returns and pay his own taxes directly to the IRS rather than having them deducted.

The subcontractor might be able to take more deductions for work expenses that he could take as an employee.

You and your boss don't just get to decide whether you are an employee or a subcontractor - that depends on what your job is, and on how much control you have on how it's done, how much the boss has. See http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

Answer 6

Good for the boss; bad for the sub. Employer pays half the fica tax; a sub pays the whole 15.3% and the employer pays none. As a contractor you are not covered by unemployment, disability, pension, basically everything. If you get hurt you are sol. There are also the rules that determine if you are truly a contractor or an employee. If the IRS determines that you are an employee they can go back and fine and penalize the employer from the first day they classify you as an employee; no time limit; years and years if they so determine. That is only part of it; the state agencies are given the information and they too go back to day one and impose penalties, fines, interest and whatever they can think of. I know one person who lost his trucking company and took out backruptcy because of doing this. Your boss should tread lightly as everything he owns is at risk.

Answer 7

On made the mistake of becoming a sub 15 years ago and at that time it seemed really attractive. I enjoyed the work and the freedom that went along with it. At that time I was married and had health insurance through her and obviously two incomes. Work was plentiful and it seemed like I was making great money and I was compared to my former job. Due to me not looking at any of the pros and con's I currently owe the IRS a very significant amount of money. I went through the recession in 2008 &2009. I currently have plenty of work and enjoy what I do but I live check to check I have no retirrment,health insurance, vacation nothing! My prime contractor expects me to work 6&7 days a week to get the scope of work done while he takes in all the profit, has every weekend off and determines when I get paid. He can change the "rules" anytime he wants because there's no policy of any kind. I know it sound like I'm whining I still love the work but I would think twice

Answer 8

Are there any significant changes in your duties? Whose tools and business location do you use? Do you set your own hours? Are you getting your own city business license? Does the occupation require some special license and do you have it or does the boss say it's ok for you not to have it? Will you have the ability to make greater profit or suffer business losses or are things pretty much unchanged. Is the amount you will be paid enough over your current wages to compensate for the loss of fringe benefits and paying both halves of social security? If things are sounding fishy, they probably are. Don't bite.

Answer 9

It will suck. He wants you to be a subcontractor so he doesn't have to pony up half of your Social Security and Medicare.

Answer 10

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