1099 consulting job

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AQ
Posts: 444
Joined: Mon Feb 25, 2008 11:38 pm

1099 consulting job

Post by AQ » Sat Dec 19, 2015 2:42 am

I'm deciding between a regular job offer and a consulting one, but I never worked on a 1099 previously. What types of things do I need to consider when comparing a consulting arrangement with a regular one? A few specific questions below, but please share any wisdom/experiences or links. Many thanks!

1) a consulting job doesn't have any benefits. How much money is a best benefit program worth? 50K, 100K? (I'm trying to add values of some implicit benefits like severance package a regular job may offer). Or how much more shall one need to lean toward a consulting job (assuming everything else equal)

2) Does a 1099 job require payroll tax like medicare tax/SS tax, unemployment, etc? I imagine if the consulting job ends, one is NOT qualified for unemployment benefit?

3) I suppose I can use Cobra health insurance from my prior employer? Or some employers don't allow it?

4) Does AFA healthcare offer plans which have similar level of acceptance? I read some doctors/hospitals don't want to take medicare patients so wonder if AFA plans also have similar issues?

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: 1099 consulting job

Post by Spirit Rider » Sat Dec 19, 2015 1:03 pm

1) It isn't an amount of money by rather a compensation premium. Employee benefit programs cost most companies 20% - 30% of payroll. This means you should receive a 25% - 50% premium. There are those who will throw out numbers like you should get double your equivalent W-2 hourly rate. That is just not practical for the majority of people. There is a supply and demand equation. Most people should be able to get a 25% - 50% premium. Those with commodity experience in weak job markets will test the low end and those with valuable skills can get above the high end.

2) A 1099 does not necessarily establish business tax structure. However, the default sole proprietor will pay a 15.3% Self-Employment (SE) tax on net business profits. The is equivalent to paying both the employee FICA (7.65%) and employer FICA (7.65).

3) COBRA is a federal law. It does not matter how you separate from employment. Neither your previous employer nor your client can prevent you from using COBRA for 18 months.

4) I am assuming you mean ACA. While some plans ACA Marketplace plans have smaller networks than some other plans, they still have substantial networks. You should compare your COBRA plan coverage/cost to Marketplace plans coverage/costs.

NOTE: Only the loss of employer coverage or the period elapse of COBRA qualify for a special enrollment period. If you decide a Marketplace plan will be better, you will need to enroll within 60 days of losing your employment coverage or during the open enrollment period if you are in COBRA coverage. The open enrollment lasts from 11/1 - 01/31. You have already missed the deadline for coverage starting 01/01/16, but you have until 01/15 for coverage starting 02/01/16, and 01/31 for coverage starting 03/01/16.

Vilgan
Posts: 144
Joined: Sun Dec 15, 2013 12:46 pm

Re: 1099 consulting job

Post by Vilgan » Sat Dec 19, 2015 1:37 pm

Specific answers in a bit, but some general thoughts on 1099 vs FTE:

1099 work most of the risk and responsibilities are shifted to you instead of the employer, so you should be compensated appropriately for taking on that risk. Its fine to figure out the dollar amount that you need to achieve parity after you cover the extra taxes and benefits, but you are selling yourself cheap if that's all you account for when comparing prices. I usually pay 1099 contractors that work for me 50-100% more than I would pay them salary because I highly value the flexibility it gives me. If business cools down or someone doesn't work as hard or a variety of other things happen I can terminate the contract instead of dealing with the nightmare that is firing a W-2 employee.

Realize that the 1099 has a good chance of ending after a year or some other period of time leaving you looking for a job. Again, higher compensation with the 1099 job should cover that.

As to your specific questions:

1) I've heard that benefits work out to between 15-20% which jives with what I've seen.
2) Depends on how you set yourself up, but you will not only pay regular payroll tax but you'll also pay the portion that the employer usually pays for you that's invisible to an FTE. This is the "self employment tax". You'll have to pay this quarterly. This covers medicare and social security, unemployment is something else and you won't have to worry about it unless you set up an s-corp or an llc that registers as an s corp.
3) You can use cobra for a bit but its super expensive, I actually found ACA (Obamacare) to be way more affordable. If you have a spouse you might be able to go on their healthcare and pocket the money difference.
4) I assume you are talking about ACA, and doctors will accept them. Its regular medical insurance. Some cheaper insurance plans will have smaller groups of "in plan" doctors and charge you more when you use others, but that's a regular insurance thing and isn't special to ACA. My experience with ACA was fine - I had a higher deductible but paid $300/month less than I would have with cobra ($180 instead of $480).

I've been self employed for a while now so all my income is 1099. I prefer it as you get more flexibility and can make your own decisions as to what benefits you care about and have your own 401k plan and such, but comparing an FTE offer or a 1099 offer the 1099 offer would need to be a bare minimum of 40%-50% higher to make up for everything else I would be taking on and preferably 75-100% higher.

Good luck!


Note: I included my preferences of hiring 1099 for illustrative purposes to help show why it has value, I'm well aware of the legal requirements to avoid getting them reclassified as an employee.

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Hayden
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Re: 1099 consulting job

Post by Hayden » Sat Dec 19, 2015 1:52 pm

Unemployment and workers compensation are state specific. You should contact your specific state to understand the rules.

Also, ask your state about licensing requirements, taxes, etc. In my state, I have to file and pay taxes monthly.

AQ
Posts: 444
Joined: Mon Feb 25, 2008 11:38 pm

Re: 1099 consulting job

Post by AQ » Sat Dec 19, 2015 3:51 pm

Thanks a lot for your responses so far. A couple of follow-up questions:

1) Do I need to form a kind of business structures before I can start a consulting job? Or I simply enter a contract with a firm, and start to work on it?

2) 15.3% Self-Employment (SE) tax on net business profits: The SE tax would be much lower once the SS tax cap is reached? If for example, I work with one company in the first half of 2016, and with another one in the second half, I really only need to pay SS tax cap once, correct? I'm also confused with the 'net business profits'.. I'll be still paid out with some deferred comp from my prior employer. Initially I thought all incomes (both from regular income and consulting income) will be shown up in my 2016 personal income tax form 1040. Do you allude to that I need to have a separate entity and file business tax through that entity with consulting job income?

ralph124cf
Posts: 2011
Joined: Tue Apr 01, 2014 11:41 am

Re: 1099 consulting job

Post by ralph124cf » Sat Dec 19, 2015 4:21 pm

You are generally allowed, but not required, to form a separate business structure such as a subchapter S Corporation, when you do consulting work. If you do, then the company that you are consulting for pays your company, and your company pays you as a W-2 employee. Most individual consultants choose not to do this unless they are very highly paid because of the extra paperwork and taxes. If you choose to do this, you will probably want to consult a tax lawyer.

With respect to the SS wage base, that is correct you do not need to pay SS for earnings greater than the SS wage base. You do however need to continue to pay the Medicare tax on all earned income.

Ralph

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: 1099 consulting job

Post by Spirit Rider » Sat Dec 19, 2015 6:25 pm

No, you do not need to form a separate business entity. There is your business entity and there is your IRS tax structure. The two are not necessarily co-dependent. The business entity/tax structure choices for most consultants are:
  1. Sole Proprietor
  2. Default Single Member LLC, treated by the IRS as a Solo Proprietor
  3. Single Member LLC that elects subchapter S treatment, treated by the IRS as an S-Corp
  4. Corporation that elects subchapter S treatment, treated by the IRS as an S-Corp.
1 and 2 file with Schedule C and Schedule SE. The SE tax calculation takes into account the total net business profit of all clients combined. It also takes into account any W-2 earnings from other employers. The limit is applied first to the W-2 earnings and then the self-employment earnings. The deferred compensation will typically treated as W-2 earnings and will have income tax and FICA deductions. All of these still flow onto your individual Form 1040.

3 and 4 are paid W-2 wages subject to income tax and FICA withholding. The S-Corp files for 1120S. Both the W-2 wages and 1120S distributions flow thru onto your individual Form 1040. The primary benefit of either S-Corp treatment is that distributions are not subject to FICA taxes. However, the IRA has gotten more aggressive in assuring that you take a "reasonable" salary.

I generally recommend either 1 or 3 depending on your individual circumstances. 2 provides an illusion of liability protection which does not really exist for a consultant providing professional services. If they are at risk they really need business liability insurance anyways. Depending on the state an LLC electing subchapter S can be less expensive than plain S-Corp route.

Some myths to keep in mind. Default SMLLCs do not provide some magic exclusive liability protection for most people. They do not provide large magical tax benefits. They are not necessary or beneficial to retirement plan contributions. Also, S-Corps do not provide greater possibilities for retirement plan contributions. In fact minimizing W-2 wages reduces your possible employer contributions. Although, like distributions, employer retirement plan contributions are not subject to FICA.

The S-Corp distribution and employer contribution FICA savings can be real, but there are other factors to consider and some of these are highly state dependent. Therefore, the advice to seek professional advice for YOUR specific circumstances is spot on.

Elysium
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Joined: Mon Apr 02, 2007 6:22 pm

Re: 1099 consulting job

Post by Elysium » Sat Dec 19, 2015 6:50 pm

I have done little bit of 1099 work many years back, and I am considering going solo again recently if the right offer comes through.

As others have said, expect at least 50% premium over your current salary. You can use this as a simple rule and not worry too much about 401k match, health care plan costs, etc, as this will cover for the most generous of benefits packages in my calculation.

As a rule of thumb for instance if you get paid $100 an hour in 1099 that should work out much better than getting $70 on W-2 with all the benefits, given you work a minimum of 48 weeks. You can work out the math using various scenarios to see how it impacts your bottom line.

A buffer is needed in order to handle any unforeseen down time, and if you get lucky you could rake in a lot of dough if the year goes well.

I am myself trying to get a good contract before jumping in to this. There is always risk, that is why you need to negotiate the rates well. But you can always average out things even if you sometimes end up taking in a lower rate than you desire, say for instance you do the lower rate to get the cash flow going then wait for a higher rate to show up and then make it up. Sometimes as 1099 worker you could get in a lot of overtime work and make up quickly for lost wages even with a lower rate. Typically employers do not make 1099 contractor work longer hours due to this reason, but FTE will have to put in the hours when asked for.

As for tax structure, it works better when you have to an S-Corp and do a C2C contract, because in 1099 you pay for FICA share of employer and cannot claim it back unlike in S-Corp when you have tax breaks based on divided pass through.

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