Becoming a contractor. What do I need to know?

Whether you are considered and independent contractor or an employee depends on your facts and circumstances. The IRS should have a publication on its website outlining the factors it considers in making the determination.

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-----> real address on hobokeni or hobokenx

Sorry, no, you CANNOT nor should you trust your employer to "do the right thing". I can almost guarantee that regardless of the circumstances your employer will try to characterize your work as being that of a contractor. That way, his bottom line is improved even if it is illegal.

On Tue, 19 Feb 2008 21:42:21 EST, snipped-for-privacy@hotmail.com wrote Re Becoming a contractor. What do I need to know?:

Keep in mind that if paid via 1099 rather than w-2 that you will have to pay the employer's share of social security taxes. That's approximately 7.5%; so for a given hourly rate you net 7.5% less via a

1099. Your particular state may also take a bite.

I understand. The common law definition of employee is in IRS Pub 15. That's why I said "at this point, I do not know". I mean: I do not know if the terms of the arrangement will meet the definition of employee or not.

Thanks. I'm aware of that, in general. I was hoping for some specifics (like the pointer to Pub 15), just in case I overlook something important. I'm not asking anyone to do the legwork for me. But I'll bet there are knowledgable contractors who can rattle off some of the issues that they deal with all the time.

For example, the fact that if I'm a "1099 contractor", I need to cover the employer's part of FICA as well, in effect. Consequently, I need to be ready with two different wage structures, since my goal is a certain after-tax income.

A dollar to a donut says that you will be treated as a contractor. That's just the "way of the world."

ChEAr$, Harlan Lunsford, EA n LA

Well now, be careful about that. Many times a former employer needs the expertise of a former employee and arranges for him to come back on a pay per day basis, so he can stand around and watch and offer advice on this or that, or processes, procedures, sort of a combination trainer and efficiency expert. Nothing wrong with this kind of arrangement.

ChEAr$, Harlan Lunsford, EA n LA

Indeed. The ILLEGAL way.

I feel sorry for pe> Well now, be careful about that.  Many times a former employer

I want to second that emotion. It is simply wrong to make sweeping generalizations, as "sharx35" did.

Each case must be assessed in context. While I might be wary of a company and people that I have never dealt with, my trusting nature __in_this_case__ is based on the fact that I had worked for the company for more than 34 years, and I have known the people who are hiring me for, gee, 20 years.

As a stellar example of their trustworthiness, consider the pay negotiation. I figured that I needed to gross a certain hourly rate in order to meet my income goals. They thought it was too low(!), based on their experience with other contractors. So they counter-offered with a rate that is 22% higher.

I expected that myself; and in the final analysis, you are correct.

But many years ago, the same company went through a recharacterization of its relationship with consultants, changing many to an employer-employee relationship because of the company's interpretation of the facts that distinguish an employee from an independent contractor. (See IRS Pub 15-A.)

So my "concern" (more like a question) is not without basis.

I'll agree that not everyone is out to cheat you. But I can tell you that I've seen people get too greedy too often, and very often those are the people who are closest to you - family and friends.

Not trusting that someone will always do the right thing is not the same as saying that it is guaranteed he will try to cheat you. But caution dictates that you should cover yourself when possible, just in case.

Stu

Further then, with your new information.

Usually once a common law relationship (employer/emloyee) is firmly established, IRS will expect it to continue and exact draconian penalties if breached.

However, when you say "the same company", bear in mind that it may legally be different from way back when, having perhaps assumed an LLC structure. This change according to IRS would not matter, but to the powers that now be, that might be their justification for treating consultants AS contractors.

Life is strange.

ChEAr$, Harlan Lunsford, EA n LA

middle part snipped for brevity and to mollify the moderator.

The more you say about your situation, the more you sound like my client, long time and now retired textile mill supervisor whose expertise is sought from Columbus, GA up through the Carolinas.

ChEAr$, Harlan Lunsford, EA n LA

The fact remains that probably 90% of people who call themselves "consultants" or "contractors" but have only ONE client at a time are really

**employees**, according to tax law. It it WALKS like an employee, TALKS like an employee and LOOKS like an employee, it probably IS an EMPLOYEE.

========================================= MODERATOR'S COMMENT: When responding, please include only those portions of the prior post that are necessary to context or to which you specifically respond, and delete the rest. Thank you for your assistance.

A contract wage is generally less dollar-for-dollar than an employee wage. One example is you pay full social security tax of 15.3% as a contractor and only half of that as employee. Plus you will probably be paying for all of your benefits and not receiving them tax free like an employee. So the rulle of thumb is to ask for about 30% higher wages for equivalent take-home or to expect your net cut about 25%.

On the flip side you allowed to deduct more expenses. As an employee you can only deduct required expenses above 2% AGI. But as a contractor you can start deducting things like computers and trip costs right away. Learn how to do this on a 1040-C form.

There are books describing these issues for contractors. Often they are written people like computer consultants or real estate agents, but many of the issues apply to every contractor.