Full time to Contractor?

Question

My company will be terminating my full time employment the beginning of the year but would like to keep me on as a contractor. Since it would be on my own, what should I expect being self-employed? At what hourly rate should I request and should I get a business ID?

It is a Security Clearance Manager position.

Sorry I'm adding late info......I will use all of their equipment to do the job and I will obviously work from home.

I am a military spouse and I utilize spouse benefits. I really don't plan to continue with this situation more than a year if that.

Answer 1

Your company is lighting a time bomb unless your duties are changing dramatically. That or they don't plan to keep your around long. And the job, Security Manager, that fairly screams employee.

I have a canned explanation to apparently clueless independent contractors--and that is just about everybody who posts to this board:

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.

In direct answer to your question: If they are asking for an hourly rate that is solid evidence that they intend to treat you like an employee. If they aren't willing to add at leat 50% I would start looking for another job.

Answer 2

Your rate should be about 40% higher as a contractor than as an employee. You will have to get your own medical insurance. You will no longer have paid sick leave or vacation time. You will have to pay self-employment tax which is twice the Social security tax that you now have withheld. (Due to some tax provision, it's not exactly twice, but close enough for this forum)

If you go through with this, you will have to pay quarterly estimated taxes to the federal and state governments.

The real question is will you really be a contractor. There is a check list of 20 questions that you can use to help you figure out the answer. One place on the Internet I found was http://ohioline.osu.edu/cd-fact/1179.html but there are many others.

Answer 3

Your company is pulling a fast one on you.

They cannot terminate you as an employee and then call you a contractor, make you do the same exact work and hours and move the pay to a 1099-Misc. If they really do make you an independent contractor (and show the IRS that this qualifies), they are passing all tax responsibilities off to you.

This is a big deal. An employee owes 7.65% of their pay for payroll taxes and the employer matches it. If you were truly an independent contractor, you would pay 15.3% (both sides).
This is on top of your income tax which since it's not longer being withheld, you become responsible for calculating sending in quarterly estimated payments.

No, you do not need a business ID. This is true even if you start doing work for multiple businesses.

Look at IRS form SS-8 and form 8919 (NEW FOR 2007).

Answer 4

Look into this very closely. You will be required to keep all the paperwork your boss now keeps. Salary, withholding, SS Taxes (Both halves), medical insurance, liability insurance and anything else you can think of. I would expect to receive an hourly compensation of at least twice what you receive now. Otherwise it would almost certainly be a cut in pay.

Check with the business licensing agency in your county and see what you need to be an independent contractor. They will probably want something for accountability if nothing else. And, don't forget to factor those costs in your bid as well.

Answer 5

First, my condolences that you will be experiencing this uncomfortable bump in your life's road. However, I want to assure you that there is hope.

I see from the other posts that people have said to charge anywhere from 15% - 100% more. I would lean more toward the 100%.

My answer comes from the perspective of being a spouse to a person who is self-employed. My husband switched from being an employee of a company, to finding work on his own as a contractor. Fours year ago he was getting paid about $34 an hour with benefits (and not very good ones at that). Now he charges $75-$100 an hour, depending on the client (he is a software engineer), and we pay everything that an employer would have paid, but out of our own pockets.

We were recently advised by our accountant to get a business ID and file a DBA (doing business as). Now I will start working for my husband as an employee (I always have, but the pay was buried in his pay), and we will get further tax benefits from that (deductions relating to health insurance, etc).

When my husband first switched to self-employed, I was terrified. Especially when he said he would start charging $75/hour. I thought for sure no one would hire him. He assured me that it was an industry standard for contractors and that he'd make more money being on his own.

He was right, and then some. He has head-hunters emailing and calling him regularly, willing to pay that and more. He's never been busier.

The negatives:
There is a lot of time investment you will have to make to shop around for good health, life and disability insurances - and it does take a big chunk out of your pay (our health ins. is for a family of 4 (no dental or eye), we have 2 BIG life ins. policies, and a disability ins policy - and it costs us about $5600 per year (steadily rising) not including any co-pays or deductibles for doc visits, etc).

If you have health insurance with your company and anticipate losing it or moving into a COBRA coverage situation, check out an option to switch from group coverage to individual (that is, find out if your insurance is convertible - if it is, that is GOOD - refuse the COBRA and convert to individual because COBRA is a FORTUNE. I repeat... FORTUNE)

The other down side is that there is no pension or 401(k) with employee matching. But as a self-employed person, you can max out a ROTH IRA and open a SEP (self-employment plan) for the rest, which has higher contribution limits.

I hope some of this information helps, if not to allay any anxiety you might be feeling. Good luck!

Answer 6

You will have to get an I.D. Do not even consider what hourly rate you should request. Instead, tack on an additional 20% to what you made this year, and then break that down to a hourly rate. I have been self-employed for many years, and it has it's plusses and minuses. You will have to spend time away from work doing the paperwork needed to comply with I.R.S. regulations, and will have to send in your income taxes, and other payroll deductions on a quarterly basis. Because of this I recomend you set up a seperate checking account, and deposit 30-35% of each check in this account just to pay taxes.

Answer 7

Do some research on other contractors in your feild and see what their rates are. I know that contract engineers make alot of money hourly because they usually work long hours but make alot of money for one job in a shorter amount of time. Some of these people can make over 100/hour. Its good to set the rate high and then negotiate if they have a problem with it.

Answer 8

Since you will be paying your own taxes at tax time you should request an hourly rate that is 5 to 10% higher than your rate now to cover your taxes. Also send in monthly estimated payments to the IRS to cover the amount you will owe after filing your taxes. If you are really good with money you can also just put that 15% in savings and let it draw interest. You don't need a business id if you are only working for that company.

Answer 9

the employee vs contractor is a sensitive issue. are you essentially performing the same functions? ie: using the company's resources to perform your work (computer, office spaces...etc). There are old cases where the IRS denied contractor status and idenfified those people as employees.

There are employment taxes consequences also for both you and the company, not to mention you will lose all the company's benefits.

Answer 10

Yes, you'll be self-employed. Your SSN will be your business ID for IRS purposes if you are the only employee of your company and your labor is your only product.

You should charge at least what you were making hourly at your old job plus 40% because the value of the benefits your employer was paying for (retirement accrual, health insurance, etc.) was costing your company about 40% in addition to your salary. Now, you're going to have to cover them yourself. You should probably even consider 50% plus your old salary, since you're not going to be able to get health insurance and retirement account returns as efficiently as your company does with group rates and investment access.