It's not in the wording of the offer letter but in the substance of the position itself that the IRS determines whether or not you are mis-classified employee.

We covered this in an earlier post... it happens a lot. I've been through this personally as have many others in this field. Essentially what is happening is payroll tax evasion, and it matters to the IRS - SHOULD you care to report it. The IRS has a simple list of 2 or 3 criterion that help you determine whether or not you have been mis-reported as a contract employee when in fact you should be considered a full-time salaried employee. It has to do with how your employer has authority over your work - are you contracted to fulfill a set obligation, with a particular end product that will be turned over to the company at the end of your contract term? And do you have full authority over when & how you want to work on that product? OR are you a) expected to report to work at set hours every day, b) expected to work on whatever they give you, and c) expected to complete the work under the supervision of a manager at the company? If the latter, you should be classified as an employee (full-time or not - the number of hours worked are not relevant); if the former, you are self-employed, and should have control over your own working hours, working location, etcetera.

So, clearly from the IRS' point of view, this position is incorrectly being classified as a contract employee. However, from your point of view that's not necessarily a bad thing - AS LONG AS YOU COMPLETELY UNDERSTAND, AND NEGOTIATE, the ramifications.

Will come back to this later, have to eat dinner.

add 30% if your contract to cover your taxes

Ok, ramifications:

Bad:
- You have to pay self-employment taxes on anything you make as a contract employee. Self-employment taxes are GIANT - in fact, a portion of your earnings are actually even double-taxed, which aggravated the heck out of me - so make sure you negotiate an hourly base rate which allows for taxes. I would add 33% personally (my self-employment taxes came out to close to 35% of earnings.)

- Also bad, you have no benefits. So, you need to make sure your pay rate is high enough to enable you to get your own health insurance.

Good:
- You should get paid for every single hour you work, even if that's 90 hours in one week. HOWEVER, you need to make sure that's the understanding with your employer. If not, I personally would walk away. This is pretty much the sole benefit to being a contract employee. (Another option, should you prefer, would be to negotiate the exact work they are asking you to do, and then negotiate a set price for it - regardless of how many hours it takes. Since you are presumably young and inexperienced, changes are you will wildly underestimate how much time it takes to the work, and will end up severely underpaid, so I don't recommend this route.)

- In theory, they should understand that as a contract employee, you set your own hours and work methodology. That means you can arrange a time when you meet with them to discuss the work, or whatever, but you don't necessarily have to report to work 9-5. That's how it's SUPPOSED to be, of course, but your mileage may vary.

Now, it's up to you what you want to do.

If you would prefer to be salaried and you're not comfortable with this arrangement, then you need to explain that to them and come to an agreement on salaried employment. Either way, a very frank and matter of fact discussion is in order. This offer letter leaves way too much to the imagination, which means you could end up being seriously stiffed by what's left unsaid. You need to make sure, as in all situations in life, you advocate clearly, firmly, and pleasantly for yourself.

That's a total bait and switch.

As binary mentions, you need to add (at least) 30% to your reimbursement in order to be paid what you though you are making. And that's before even talking about the clusterfuck that is independent contractor health insurance. Also, no unemployment insurance once they are done with you.

Bring up the money. If the firm balks, you will at least have a better idea of what you are dealing with.

It is not unusual for companies to have some form of probationary period (3 months seems standard), but this is far and beyond that.

mantaray: great points. I do disagree that self employment necessarily entails per hour reimbursement. It's possible to be paid per project basis. In later case you are using your own facilities and equipment though.

If you show up to someone else's office M-F 9-6 by all litmus tests you are a salaried employee and IRS loves hearing from you.

on the other hand, what the hell else were you going to do for the next 3 months

:)

As mentioned above, many firms have probation periods of 90 days to make sure it is a good fit between employee and firm. Either party can part ways during the time period. After three months they have a review of your work and offer a salary position with benefits. This really isn't uncommon. I'm not saying it is right, but it happens all the time.

I would just sit down with your employer and discuss all these issues and concerns. If you can't have an open and honest discussion with the HR people at the office chances are you won't want to be there very long anyway.

talkitect, you're right, but this seems a little different. we have a probation period, but that's just a see-if-we-get-along thing. during that time an employee is salaried and withholding is managed by us. true, vacation doesn't start to accrue until after that time and participation in other benefits doesn't start until then (except maybe health? i'd have to check), but the tax thing seems strange.

thanks, rustystuds, and I agree - I actually covered the per-project option in my post. (My thinking is it's not a great option for someone inexperienced.)

I would prefer for to clear up this misunderstanding and be a salaried employee.

You should ask them if after the 90 day period if all works out if they will front you for the taxable amount of your income for the first 90 days. Oh ya ask for it in Cash! Architecture Firms are a Cash Business.

Hi everyone,
just got the same offer as the opening poster, contract worker for almost half a year, sounds very shady, I'm not too savvy with the IRS numbers so im going to have to research just how much i have to pay uncle sam, if they pay me what i asked for which is 45k annual, how much of that will be uncle sams?

at 45k a year with 30% going to uncle sam, my monthly take home pay is only 500 more than my unemployment benefits, so i dont know if dealing with the IRS is really worth it. Plus after they let me go would i be eligible for unemployment ? probably not.

ps. i noticed that all the employees were acting like indentured servants, while i was taking my ACadd test.

if you use their equipment, then you have to be an employee

if you work from home, then you are contract...

do the math......

you will not like the 1099 at the end of the year if you do a base 45g a year contract and have to put in 60-80 hour weeks...

Congrats Don on a job offer (even if not great). Things are looking up! Your unemployment ends in a month anyways, so this is good timing.

You will not be eligible for unemployment after this one. The greatest benefit of being self employed is that you can write off (not pay taxes) on a bunch of items. Buy that new computer, part of your house can be deducted as business office. Car payments. Gas. Any travel or business meetings. A creative accountant will help you get the most out of this.

The problem is that IRS may call BS on you being independent contractor. How can they tell? By seeing only one source of income within a tax year. You need at least a couple of sources of income to pull this one off.

BTW your unemployment is also taxable, so your assumption that this job is only paying you $500/month more is false.

A $45K contract job would equal roughly to a $30-35K salaried position. More if you decide to say fuck it to paying for health insurance.

It sounds crappy, but you were getting very depressed over being unemployed, so this is a start towards recovery. Best of luck!

"only" 500 dollar more per month? 500 is a lot of money. A lot of architects aren't even making 500 dollars a month.

The tax issues are sketchy but a job is a job. You can always leave for better offer if one arrises. Take the opportunity, count your blessings and use the 500 dollars to buy some new camper shoes and some clothes from NAU.

Well i don't know personally i hope someone else hires me, I have a few more interviews lined up, i am thankful that things are looking up, kind of, personally I don't need health insurance for myself, since I'm a human dynamo, but my wife and now two year old could use it, maybe a negotiation to cover health insurance is in order.

you are right talkitect, 500 is a lot these days, guess I'm just not too excited about doing my own taxes if i mess up the IRS will probably find me and put a pair of concrete shoes so i can go swimming in Lake Michigan right off of Lake Shore drive, I need to go talk with an accountant.

Ps. rusty, what made you think i was depressed? nothing could be further from the truth, my family has been really happy to have me around for a year, not to mention my parents can call on me to do everything for them,I've been very busy studying for ARE's, working on cars, working on carpentry, yea i've been so busy that I cant tell I'm unemployed sometimes.

Thanks for your advice guys and ladies.

I'm going to go run 10 miles tomorrow morning, and think about this strange but timely proposition.

I think it has to do with the new Obama credit for corporate firms, they actually get some money back by hiring people now, and I think the minimum time required for the worker to stay at work is about 90 days, and the company gets $1000 or so. I think they are just finding out a way to cheat the system, hire 10 new people for 3 months then fire them, but keep the 10 grand...

This is not true. The IRS doesn't care how many sources of income you have - the definition of "contract labor" is in the way the position is structured, contracted, and supervised - not in how many of these you do per year. Trust me, I've actually been audited by the IRS on this very issue and have had to sit down and go over it with them ad nauseum. (ESPECIALLY in this market - nobody will bat an eye if your contract work only includes one client.) That is absolutely NOT a litmus test for the IRS.

HOWEVER, as I mentioned above these kinds of offers ARE non-compliant with the IRS' definition of contract work, no matter what. AND trust me, if you're not really set up and prepared to be self-employed, you're not going to be able to itemize all the fun toys you buy - you really have to work closely with an accountant for those, from day 1, and fully know all the ins and outs of what you're doing. OH, and I forgot to mention above, taxes must be paid quarterly, not annually. NOT FUN.

my own take (and i don't do this type thing at our own firm) is that the company in question is trying to do two things: first, and foremost, they're trying to avoid a potential hit on their unemployment taxes if the position doesn't work out. the last two years have seen the tax burden on companies explode. it's no fun to keep paying into a system for someone who's already long gone.

once you classify an employee as full time on payroll, you're obligated to contribute to their portion of the unemployment tax. for all who don't follow these things, the government looks at what your employees have cost in benefits vs. what was paid in. so, if you have a company that never lays anyone off (officially), your tax rate is pretty low. if you keep churning employees, who all go on to extract maximum benefits (ie max time), your rate is going to be huge. the government likes each firm to be as 'revenue neutral' as possible - you don't want one firm contributing a lot more people to the stream without paying it back to some degree.

i'm surprised more firms aren't going this route for that very reason alone. for the non-owners, please try to understand - it really sucks having to pay an extra 2-3k a year for someone you laid off after 60 days because a project fell through. it's not a win-win for anyone, but can you blame a firm for being cautious? get burned enough on that (10-20 people) and you're paying for an extra person each year that you don't get to actually hire.

secondary reason might be a tax credit, but zen's a little off - you don't get a check for hiring someone. the credit only matters against income you have, so the return isn't exactly 1 to 1. i think the likely reason is to avoid paying payroll tax for as long as can reasonably be construed. as manta notes, it's probably borderline legal at best, but that's probably the reason.

let me clarify one thing: the federal unemployment rate is fixed. state unemployment tax is what i'm referring to - that varies wildly.

Pssh... unemployment taxes are not really that high. Sure, they're a cup of water in the bucket of the burden of taxes on businesses.

But they're literally $450 for federal and anywhere from 0.1% to 12% of a few thousand dollars to as much as $15,000.

Even then... employers who pay their state unemployment taxes on time do receive credits for federal unemployment tax. That can reduce your federal unemployment tax rate to 0.8%.

The point is... if a firm of 8-30 people cannot afford $16,000-30,000 of unemployment costs while billing --lets say $60 an hour average per person-- $900,000 to $3,500,000, there's something more seriously wrong with this firm than 11% of $7,000.

Even with a generous $2000 per employee unemployment tax... it makes up less than 2% of gross revenue.

Basically, what I am saying... is that if you can't afford $30,000 in a largish firm over unemployment taxes, [b]you shouldn't be hiring.

In fact, you should be hiring a consultant to come gut the business to remove waste, redundancies and fire some principals.

Or perhaps try unplugging the Nespresso machine and return it... because no one ought to be paying $15,000 a year for coffee service.

I love that you are a bookkeeper too, unicorn. Don't you love the word bookkeeper?

As outed said, they're protecting themselves against someone who ends up being a disaster, and who has to be let go. That person then files for unemployment, and the firm can be on the hook for a portion of the unemployment benefits, and their future unemployment insurance premiums will go up too.

I don't think they're really looking to save the costs of soc. sec., medicare, etc. The employer's portion of this is about 7.5% of your salary, so if you make $50K a year, you make $12.5K in 3 months. 7.% of that is $875. Really not that much. I think that savings is a collateral benefit to the unemployment strategy. The potential costs of the scenario I laid out above can be thousands of dollars.

So if you accept this deal, you'll lose out on 7% of your salary for the first 3 months.

Is this totally legal...probably not, just calling you a contract worker doesn't make you one.

Should they have increased your salary by 7% during the first 3 months to offset your self employment costs....yes.

Should they have told you about this earlier...yes.

Yes. It sounds mythical.

"I AM THE UNICORN. I AM KEEPER OF THE BOOKS! ARE YOU THE LORD OF CHECKS?"

Kind of like "keymaster" and "gatekeeper" from Ghostbusters.

I am doing bookkeeping too. I like the way the word looks and feels.

when you strip out all the excuses in this thread, is this not the only point that really matters?

ug - i agree with you up to a point. the numbers are fine. all i'm simply saying (and you haven't disagreed) is that why would any employer want to take that hit voluntarily or willingly? why would i want to fork over an extra 2K for an employee we had to let go after 60 days because the job they were hired for couldn't get its financing after all?

we're also ignoring the extra work involved internally to set up an employee. what if they need training? what if they need to buy a new computer/software/etc ultimately? it's easy to say they just shouldn't be hiring, but making a commitment to an employee in this volatile a climate isn't easy to do...

All employees in all industries need training especially if they either practice a licensed profession or a specialty trade.

It's just a practice of business. I will concede that architecture maybe an especially expensive field when expanding one's own office.

But these are risks that have to be taken. The majority of business and economic ideology is decades, if not centuries, old. And those old-fashioned ideas had a big basis when people were more self-reliant-- from the ways people traveled (big emphasis on walking) to the ways people acquired housing.

While that is a tedious argument in and of itself... it has validity. People are more reliant these days on everything other than themselves. And with that reliance comes big risk. It is totally unfair in some aspects to not be completely honest about your office's situation-- i.e., "you'll only have a job if this project becomes a reality."

Banks, landlords, car dealerships and debtors do not accept request orders or invoices as forms of payment nor do they accept "possibilities of having a job in 60-90 days."

The reason you fork over unemployment because it creates a social safety net that encourages risk tasking, reassures individuals that an apocalypse will not happen if they lose their job and it stabilizes society as a whole.

Just as you pay real estate taxes on you office because it pays for schools that are suppose to make you potential employees, it pays for cops to make sure you don't get mugged... blah blah blah. You can cheat the system all you want to save literally pennies on the dollar but you are really cheating yourself.

You take a risk on a new hire but the new hire takes a risk on you, too. And if you have a problem with new hires ducking out on you, some self-reflection maybe necessary.

Even if you assess a new employee to be low-risk, you really have no idea what their risk level actually is. You don't know if they have money in the bank, if they've default on all of their loans, if their credit cards are maxed out, if they are terminally ill or if they are suicidally depressed.

A good resume can be just as flaky as a bad resume!

You can only grow as a business if you take risks!

ug - you had to go and mention the nespresso machine, didn't you? i had a freaking dream last night where it was chasing me down the hall....

"Is this totally legal...probably not, just calling you a contract worker doesn't make you one.

when you strip out all the excuses in this thread, is this not the only point that really matters?"

adding to wons comments, the other point is that during the interview it makes us feel totally disrespected, as if an experienced interviewer like me doesn't already know that these same jerks are probably going to be totally screaming and micromanaging us, treating us like shit etc...to add insult to injury they are saying "oh and just in case you don't like how we scream at you we want total control so we can send you back out on your ass with no tax consequences for us".

ps. I was being nice by asking for 45k annual, and look how they respond? My actual salary should be more than that easy, considering that I can take their stupid napkin sketches and make them into real CD drawings.

oh well what are you going to do.