Taxes/deductions for ind. contractor versus salaried emp.

[dh1760]

Hi All,

This question regards the benefits of being an independent contractor versus being a salaried worker. I'm hoping I have found the right forum. if not, please redirect me.

I am a IT (information tech) consultant working for two employers and currently receiving W-2 wages from both. Because I get FICA deducted from both salaries I end up with a nice refund check every April (typically around $7,500).

One employer has given me the option of becoming an independent contractor and receiving 10-99 wages rather than W-2. Of course, I understand that would eliminate my FICA refund check every year, but perhaps there would be advantages which could outweigh that?

The gross annual income from the employer is about $40,000. Based on that, can anyone comment on whether it would make more financial sense for me to establish a small business, or do whatever is necessary to establish myself as an independent contractor? Would there be deductions or other tax/income offsets which would result in a larger net income (as opposed to the $7500 FICA refund I get annually). I do have a leased car, I own a home, and I do require business-related equipment and services (computers, internet services, etc).

Thanks for any advice/pointers/etc.

-Dave H.

 

[NYClex]

Well, first of all it is not that you can just choose what you want to be. It depends on the nature of the employment if you are treated as a dependent employee or an independent contractor. Go to the IRS website and have a look, they have pretty good information there explaining what the difference is in the eye of the law. The IRS is also taking a close look on these things.

Second, you still are responsible for social security tax. As an IC you have to pay quarterly estimated tax and you bear the full burden of the social security tax, as a dependent employee your employer pays 50% of it. Your income tax amount doesn't change either just because of the different classification.

If you want to open your own business providing this kind of work you might be able to deduct certain expenses that will lower your income tax. But you also might have to pay certain business taxes.

Also keep in mind that the benefit situation might dramatically change. As an IC the employer won't pay any health insurance etc. If you have to buy insurance yourself it might be much more expensive.

So if you want to go this way you should have a tax professional look at your business plan and the implications before you make a move.

 

[dh1760]

At this stage, I really do not have the intention to pursue more independent business. My only interest was in whether or not I would realize more net income from the same employer by changing my status to independent contractor rather than salaried employee. From what you've said, it sounds like I am better off keeping things status quo.

Thanks for your reply!