For tax purposes, Is it better or worse to be a consultant, not an employee?

Question

I think it is a 1099 filing.
please list the pros and cons.

Thanks for the answers. I have never worked as a non-employee before. This is a salaried position I was offered as a consultant. But i am sure the employer is skating the rules to save money.

I need to itemize the higher costs for the salary negotiations.

Answer 1

You'll pay nearly double the SS and Med taxes as self-employed. You won't have unemployment coverage or worker's comp benefits.

Some "employers" attempt to bypass paying payroll and unemployment taxes and purchasing worker's comp insurance by designating their "employees" as independent contractors. It's not legal and if challenged they will almost always lose and often face crushing burdens of back payroll taxes.

If you are a mis-designated employee, there are no pros since in most cases these dirtbags aren't paying you any extra to cover your added tax burden and your loss of unemployment benefits and worker's comp coverage.

If you were offered double the going rate for the work it might be worth it if you were sufficiently disciplined to make the estimated tax payments, set aside funds for periods of job loss and job related injury, and pay for your own health insurance. That would still not make it legal, however.

If your employer provides the workspace and tools for you to do your job and sets the hours that you must work then you are an employee by definition. You can force a decision from the IRS by filing Form SS-8 with the IRS. Here's a link: http://www.irs.gov/pub/irs-pdf/fss8.pdf

Answer 2

I have canned explanation to apparently clueless independent contractors:

Some employers try to get around paying employment taxes (social security and unemployment) and other employee benefits like workers compensation insurance by improperly classifying employees as independent contractors. The basic issue is the amount of control the employer has over the worker. If you are required to show up for work--personally--at a particular time, punch the clock, use the employers equipment and are paid an hourly rate, you are an employee. If you didn't understand the difference when you posed your question, I would be even more convinced that you are an employee. What is your preference, Slotted or Phillips? Complete an IRS Form SS-8 to get an official ruling on your status. This will help you get unemployment if you get fired. When you file your income tax return, you can attach Form 8919 Uncollected Social Security and Medicare Tax on Wages and only pay the employer's half of social security. You will still have to cough up all the income tax. IRS and the states are stepping up enforcement in the abuse area.

http://www.irs.gov/pub/irs-pdf/fss8.pdf...
http://www.irs.gov/pub/irs-pdf/f8919.pdf
http://www.irs.gov/newsroom/article/0,,id=175457,00.html

Answer 3

It is better to be an employee, worse to be a consultant.

Consultants who receive 1099's pay a self-employment tax, which is twice what they would have had withheld for social security and medicare if they were employees.

The amount of income tax is the same either way.

Answer 4

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