Consultant leaning toward 1099 instead of W2 and looking for advice

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coopermonster
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Consultant leaning toward 1099 instead of W2 and looking for advice

Post by coopermonster » Sun Apr 15, 2018 4:38 pm

I recently quit my day job to be a full-time self-employed consultant (a dream many years in the making!) and on May 1st my current employer will become my newest consulting client.

They’re letting me decide between being a part-time W2 employee or a 1099 contractor. I’ve read a number of related posts on this subject and W2 is often the winner, but my particular circumstances have me thinking 1099 will be the best option so I'm curious for feedback and advice.

With either option, I'll be working roughly 20 hours/week or 80 hours/month.

Reasons to do W2:
  • I’d be a part-time employee and eligible for medical/dental/vision benefits. However, their employer contribution is only $350/month and I could get a comparable plan through Covered California for only $400 more per month than I'm currently paying.
  • I'd have access to a 401k, but there's no employer match and it has poor investment options. I could contribute more to a Solo 401k if I were 1099 and would have better options.
  • I'd have access to a HDHP with an HSA, but there's no employer match and I could stay on the current plan for 18 months with COBRA or switch to an HDHP with HSA through Covered California
  • I'd be eligible for a 10% quarterly bonus (10% of that quarter’s salary aka 2.5% of annual salary) if we meet performance objectives (I could try to negotiate this as a 1099 contractor, too)
Reasons to do 1099:
  • They’ll pay me a ~25% higher rate to compensate for the lack of benefits, increased liability, having to pay more payroll taxes, etc.
  • I’d be able to increase my tax deductions, since I could factor in my home office/utilities/etc (don't think I can do this if I I'm W2, since my office would be used partially for "regular employment" and partially for my consulting business)
  • Could contribute more to retirement savings if I’d like via a Solo 401k
  • It’d be easier to decrease or increase my hours (and thus compensation) if I want to. Regardless of whether I go 1099 or W2, they’d like me to aim for 80 hours/month (20 hours/week), but they’re happy with me working more or less if needed (even 40 hours/week) if I want to. This could be excellent as a 1099 contractor:
    • If my consulting business picks up (and other clients are willing to pay me more $) then as a 1099 contractor it'd be easier to work fewer hours for this company and just bill them for fewer hours (we'd still have to discuss it, of course, but it'd be easier to execute than as a W2 employee).
    • If my consulting business slows down (and I have time to spare and could use the cash), then as a 1099 contractor it'd be easier to work more hours in one month and then go back down to my usual number the next month. If I were a salaried W2 employee then I don't see how this could work
  • I'd have more flexibility on taking vacation (very important to me), even if it means it's unpaid. This is one of those companies that has an “Unlimited PTO” policy that doesn't actually exist; they actively discourage people from taking time off and employees struggle to get more than 2 weeks approved per year. I, however, am looking to take full advantage of finally being self-employed and am committed to taking off at least 4 weeks per year. I've discussed this with the employer and they said that if I was a W2 employee they'd just ask that I work more hours the week before or after to make up for it (e.g. work 0 hours during the vacation week and an extra 20 hours the next week to make up for it.) This effectively means that I wouldn't actually be getting PTO as a W2 employee (since I'd have to make up for the hours), which is pretty lame. I'm also nervous about what happens if my wife and I decide to take a 3 week vacation. I'd rather have that be unpaid vacation and work just 20 hours that month, rather than having them deny my request or having to work insane hours before/after the vacation to make up for the lost time
  • This is purely psychological, but I’d feel more independent as a 1099 contractor, which is half the reason I'm switching to consulting in the first place
Questions
  • Is it just me, or is the 1099 the obvious option for my situation as long as they'll pay me ~25% more than as a W2 employee?
  • My wife and I plan to buy a house in the next 9-18 months; do you think a mortgage lender may be more reluctant to approve a loan for someone with 1099 income vs. W2 income? We have 20% down payment + a 18 month emergency fund in CDs, but consulting income will vary month to month and may be seen as less reliable income
To those who reply, thank you in advance for your time and wisdom! I'm forever grateful for the help I've received here.

Edit: just to clarify, regardless of whether I choose to be W2 or 1099 with this client, I'll be a 1099 contractor to other clients
Last edited by coopermonster on Sun Apr 15, 2018 5:02 pm, edited 1 time in total.

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ClevrChico
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Re: Consultant leaning toward 1099 instead of W2 and looking for advice

Post by ClevrChico » Sun Apr 15, 2018 4:52 pm

Have you calculated liability/E&O insurance into the 1099 rate? Since we're a risk adverse group here, I'd suggest having that lined up first if going 1099, as it can take some time.

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coopermonster
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Re: Consultant leaning toward 1099 instead of W2 and looking for advice

Post by coopermonster » Sun Apr 15, 2018 4:56 pm

Good question. I didn't include that in the above consideration because I'll need liability/E&O insurance regardless of whether I choose W2 or 1099 for this client, since I'll be working as a 1099 contractor for other clients. On that note... time to hunt for a good policy...

cadreamer2015
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Re: Consultant leaning toward 1099 instead of W2 and looking for advice

Post by cadreamer2015 » Sun Apr 15, 2018 5:14 pm

Your mortgage lender will probably want to see 2 years of past tax returns showing your self employment income. I know my lenders all asked for that when I applied for a mortgage while self employed. Kind of hard to produce that if you are just starting as a 1099 contractor. If getting a mortgage based at least in part on your income is important I’d get that squared away before switching to 1099 status. Perhaps you could start out as W2 and then switch to 1099 after you get your mortgage.
De gustibus non est disputandum

golfCaddy
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Re: Consultant leaning toward 1099 instead of W2 and looking for advice

Post by golfCaddy » Sun Apr 15, 2018 5:18 pm

Don't forget FICA taxes.

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coopermonster
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Re: Consultant leaning toward 1099 instead of W2 and looking for advice

Post by coopermonster » Sun Apr 15, 2018 5:33 pm

cadreamer2015 - That's what I feared; despite all the other reasons for going the 1099 route, if W2 will make it easier to get approved for a mortgage (since my consulting business is new as of 2018 and we'd be buying in 2019), then I suppose that may be the more prudent route. :confused

golfCaddy - Good call, though thankfully the employer is willing to pay me ~25% more as a 1099 contractor in order to compensate for FICA / payroll taxes, benefits, etc.

Anyone else have strong opinions one way or another? Particularly on the mortgage lending piece... I should have strong-but-variable consulting income by the time we buy in 2019, but my consulting biz won't even appear on my tax return until I file for 2018 in April 2019, so I won't have much to show other than bank statements or contracts.

snowman
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Re: Consultant leaning toward 1099 instead of W2 and looking for advice

Post by snowman » Sun Apr 15, 2018 6:30 pm

The advise you received on mortgage is 100% correct! 2 years of your personal tax returns is the minimum requirement. Some lenders will ask for more paperwork and it may take 2-4 month to finally get approved. Or it may fall through, you just never know. Speaking from experience - been in the 1099 shoes for almost 20 years. So if getting mortgage is important to you, absolutely no 1099 route until you close on the house!

I chose 1099, but I am a risk taker and was fed up with corporate world. It's not easy - at least these days there is ACA for health insurance. Your calculations are correct, but they are missing the element of surprise - it's all good until it isn't. Contract doesn't get signed until 6 months later; billing department is late paying; contracted amount goes down; downturn in economy means contractors get cut first, etc etc. It's much harder to fire an employee than to let contractor go. It may happen any time - be prepared for that possibility.

Having said all that, I would still choose 1099. The flexibility you get come tax time is enormous! With an S-Corp, you decide what your W-2 will look like vs. your profit, what the employee contribution to your i401k will be, how much your company will contribute etc. You also control your expenses and deductions. BTW, I chose S-Corp mostly for liability reason, based on advise from CPA and lawyer. Insurance ended up being really big expense, so you may want to start gathering quotes before you make a jump.

Hope this helps. If you have specific questions, feel free to ask.

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coopermonster
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Re: Consultant leaning toward 1099 instead of W2 and looking for advice

Post by coopermonster » Sun Apr 15, 2018 8:38 pm

snowman - thanks for your thoughtful response! Your comments on flexibility resonate strongly with me.

My wife and I are talking this through in real time, and we're still leaning toward 1099.

There's a psychological component to this that I didn't really get into in my original post: I, too, am fed up with the corporate world (we all are, but I more than most) as well as many aspects of this particular company. When I gave them notice I was expecting to make a clean break, but the consulting agreement we're now negotiating would allow me to do all the work I actually love while stepping back from the politics I hate. I fear a W2 arrangement would still leave me feeling tethered and subject to company policies and norms that don't sit well with me.

There are indeed risks inherent in 1099 vs W2, but I'll be a 1099 contractor for other companies regardless, and this particular company is willing to pay me +25% more as a 1099 contractor, making most W2 benefits moot. The mortgage lending piece still looms large, but my wife and I just discussed, and we're fine pushing out a home purchase by an extra year to give us 2 years of 1099 tax returns. We plan to move away from the Bay Area sometime in 2018, but we still don't know where and it'd make sense for us to rent for 1+ before buying to be sure we know the area and buy the "right" house we're happy living in for 10+ years.

Update: we've now received quotes for liability insurance:
  • General liability insurance: $500/yr for $1M/$2M from The Hartford
  • Professional liability (E&O): $1,258/yr for $1M/$2M from Philadelphia Indemnity Insurance Co.

Spirit Rider
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Re: Consultant leaning toward 1099 instead of W2 and looking for advice

Post by Spirit Rider » Mon Apr 16, 2018 12:29 am

Normally, I would consider a 25% IC premium over W-2 as insufficient. However, as an anchor for other IC contracts with the flexibility of hours it pulls above its weight.

I don't know if this is still relevant. When I tried to get a mortgage with less than two years of IC earned income. They took my earned income to date and divided by 24 to get my monthly income. Put another way, I got credit for 15/24 (62.5%) of my average monthly IC earned income for less than two years.

Because of this, I was unable to get government backed mortgage (pretty much all mortgages). Luckily mortgage holders had tons of foreclosures in inventory. They were willing to issue their own portfolio mortgage for one of those properties, because they already owned the property and were not risking any additional capital.

If the same under writing rules are in place and you want to go down this path. You should try to maximize your earnings such that when they are diluted by not having two years of earned income your credited average monthly earnings are sufficient to qualify for the mortgage you want.

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