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W-2 Hourly vs. Incorporated

I have been a W-2 hourly employee of a consulting co. for some time now. The client outsourced but wanted to keep me. So I am switching to a preferred vendor of the firm the clients outsourced to. The company that got the outsourcing contract told the prefered vendor that rates will remain the same. I know the bill rate. Lets say it is 100/hr. Currently, I am getting 80% as W-2 hourly employee. I want to incorporate finally and go as Corp-to-Corp. So, the age old question, how much should I get as Corp-to-Corp? The new broker offered to pay 7.65% extra since they won't be paying any taxes and I will be paying all taxes. That will give them 12.35%. I think it is too much for doing little. I am thinking something like 6-7% is fair, if that. As I understand, this margin is pure profit for them after their expenses to pay my corp. I say I should get 94% of the bill rate now. What do you folks think? Thanks.

Rob
Saturday, May 01, 2004

"The new broker offered to pay 7.65% extra since they won't be paying any taxes and I will be paying all taxes."

The taxes aren't the only expense an employer has to cover on their W-2 employees. Since you are now technically the employer of yourself, a few other expenses to think about:

1. Health, disability insurance.
2. Vacations and sick time.

All of these expenses, plus the payroll taxes, are rolled into the rate that consulting firms charge for their W-2 employees. So there is more to it than just the 7.65% percent to cover payroll taxes.

I'd also recommend double checking what the exact payroll taxes are going to be. FICA is going be roughly 7.5%, I forget the FUTA rates, and the state will normally charge a higher unemployment tax when you first start off. Then there are the various state and city taxes that might come into play. Anyway, just make sure that the 7.65% really does cover all of your payroll tax expense.

Good luck!

Mark Hoffman
Saturday, May 01, 2004

Payroll tax is 7.65% up until you mean your annual obligation. Employees pay 7.65% in FICA up to the same point. So, the government collects 15.3% in social security money.

When you're self employed, the Payroll tax isn't paid, but a Self Employment tax is paid and, magically, it's 7.65% and up until the same obligation. :-p It all goes to the same place, of course.

As far as I know, it's been like that for many many years. What changes every year is that they raise the level at which your obligation stops. If memory serves, for 2003, it was pretty near to $90,000 of gross wages.

Brad Wilson (dotnetguy.techieswithcats.com)
Saturday, May 01, 2004

So, what does the broker pay, if any, when I go corp-to-corp? I am guessing nothing. The only cost to them is the cost to pay my corp. Am I right?

Rob
Saturday, May 01, 2004

That's right. If you go Corp to Corp, then they don't pay the Payroll taxes, you do (because once you're incorporated, then it switches from a Self Employment tax to a Payroll tax).

Brad Wilson (dotnetguy.techieswithcats.com)
Saturday, May 01, 2004

Welcome to the great recruiter scam. Yes, they will happily take as much money as possible without doing a thing to earn it, and tie you up in contracts and lies if you dare to question it.

In your situation, one solution is to sunset the recruiter's margin, which means it has a phase-out date instead of just remaining there for ever. So after six months it declines to half its initial value, and after 12 months it disappears.


Saturday, May 01, 2004

As a 1099 you should get 2x what you get as a W-2. Otherwise walk away.

First of all, all their costs are now your costs - hardware, software, books, training.

Medical, dental, various other benefits - gone. (medical for a family can run $12k/year or more)

The tax shift mentioned above.

You're paying for vacation time by not earning during vacations. In addition vacation time is no longer an entitlement - you pretty much have to negotiate for it.

Your pay is offset by *at least* two weeks, likely four. (As a salaried employee, you're paid on time like clockwork. As a 1099 you have to work the time, submit an invoice, and wait for them to pay you)

Finally, don't think "but I get paid for every hour I work" - that's true, but it's a rare client that will eat 50-60 hour/week invoices without complaining, even if that's what it takes. Even though you were working 50 hours/week salaried to meet their schedules, if you go 1099 they will budget 40 hours/week at your pay rate, and "overtime" will really chap their hides. Never mind that you do good work, or meet schedules, or create perfect code - every two weeks you'll have to have the same argument about "trying to keep costs down"

So you have to budget for 40 hours/ week, and generally that means 2x the pay to maintain the same standard of living.

Philo

Philo
Saturday, May 01, 2004

The other reason for the 2x rule (which is a good rule) is because you'll be on the bench from time to time. You can't necessarily count on working 50 x 40 or 48 x 40. Most of the consultants I know assume they'll work about 35 weeks a year.

Brad Wilson (dotnetguy.techieswithcats.com)
Saturday, May 01, 2004

Gentlemen, I already get 80% of the bill rate. My questions are:

1. Does the broker have any expenses at all? I know all taxes become my problem. I don't worry about medical insurance since I get that from my wife's employer.

2. This broker didn't even find me the contract. How much of the bill rate should I agree to give them to just send a check to my Corp? Is 6% of the bill rate fair?

Rob
Saturday, May 01, 2004


You seem to be quite concerned about how money the broker is getting. What the hell does it matter?

The question you need to be asking yourself, and what people here are trying to tell you, is make damn certain you are getting what you need to cover all of your expenses.

It doesn't matter if you are getting 80% of the bill rate if 80% isn't enough to cover your expenses.

I don't care if a broker is making 4 billion a year on my services as long as I am earning what I wanted.

Whatever
Sunday, May 02, 2004

To see if the rate is reasonable you could see what other firms charge for the service.

You could also find out what it takes to become a prefered vendor so you could go direct. Then you will have an idea of their overhead.  There may be expenses you have not considered.

Another issue is whether you get paid on a regular basis or after the agency has been paid.  If you want them to pay you based on your invoice instead of when the client pays them it costs them money.

Finally, I did this a few years ago and with the expense of incoporating, getting a business account and the extra accounting, tax filing etc was not worth it to me.  YMMV.

John
Sunday, May 02, 2004

Also remember that if you are 1099, and they refuse to pay you, you have to take them to court to collect.  The legal fees may exceed the amount they owe you.

If you are W-2, and they refuse to pay you, the state Labor board will probably puruse collection for you.

It seems that almost everyone I know who's a consultant has stories about clients refusing to pay.

Anonymous
Sunday, May 02, 2004

It sounds like the broker is not doing anything much to earn that cut.

Here in Australia we have firms called contract management firms that do nothing else but pay the contractor, and they charge 3 percent. Included in that is workers compensation insurance and so on.

But what is it really worth? About $120 per week, if that.

a
Monday, May 03, 2004

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