i believe you have to pay more taxes as an independent contractor than as an employee.

The main things are:

-there won't be any benefits

-less job security since they can "no longer require your services" at any point

-they won't take taxes out of your paycheck, so you very much need to keep that in mind come tax season (i.e. don't blow it all)

-you may want to look into liability issues since their liability insurance may not cover you in the event of a suit against something you worked on

In most states, even if a salaried employee, you are an "employee at will" and can be let go at any time. However, as an independent contractor, you will not qualify for unemployment.

You also won't get paid for vacation time, etc., just time worked.

The tax amount can be high. The employer is saving money by hiring you as a consultant unless they pay your more. for example, in my firm, if you were starting out at $16,80 per hour ($35,000) as a salary employee, you would actually cost me $24.50 per hour for every hour you work. That takes into account insurance, taxes, vacation, pension plan contribution. We have really good benefits, so it is not that high at every firm, but that is what I would pay you as a consultant as an equivalent.

without taking into consideration things like vacation, pension, health insurance etc., just the taxes are around 12% of the hourly rate. You won't have to pay some of them, for example unemployment, but you will have to pa at least 6.25 of your salary into social security (usually an employer pays 6.2, plus the employee pays 6.2- in this case you would pay the whole 12.4%. )

FYI, the IRS is really cracking down on this. If you are going to their place of employment and working under their direction, they are probably not meeting the requirements of the law.

Good post, archie, full of facts.

My off-the-cuff advice is to set aside 1/3 of your contract wages to pay in taxes. And, you have to pay taxes every quarter, not just once a year. So if you were hoping for a salary of $45,000 as an employee, then as a contact worker you need to ask for about $58,000. Put 1/3 of that in a savings account and pay it to the fed and state on 1 April, 1 July, etc.

On the plus side, as a contract worker you can claim a lot more of your expenses - commuting costs, for example. So you may end up getting a nice chunk back at the end of the year.

Having just finished a year of contract work and being fully paid up with .gov, I feel the need to offer some friendly advice, and hopefully clear up some common misconceptions as well:

1. Figure at least 25% of your hourly rate to go to taxes, which must be paid quarterly. "Quarterly", not being the typical definition of "every three months", but rather 15 Jan, 15 Apr, 15 Jun and 15 Sep.

2. Unfortunately, commuting is NOT deductible, even for independent contractors. The IRS makes this very clear in unambiguous terms. If you travel to an office to work, back/forth from your home (as an employee would), that is considered "commuting," and, therefore, not deductible. Only trips between your workplace and other places are considered deductible. Often, these will be trips to the job site, consultant's offices, etc., and you should be reimbursed for these by the firm. However, if you do receive reimbursement, you cannot count this mileage for deductions.

Other deductions are far and few between, unless you are running an office out of your home, and can write off equipment, software, supplies, etc. The home office deduction is not as straightforward as it seems, though, and, if overdone, will most certainly be a trigger for an audit. Many contract positions with architectural firms are prima facie "employee" positions, with all of the overhead associated with an employee (facility cost, equipment, maintenance), leaving little in the form of deductions for the independent contractor.

Having paid over $12k last year in taxes on $54k of contract income, believe me, I looked high and low for deductions, but only came up with $1k worth, making my net "profit" look like $53k, as far as the IRS is concerned. It is simply impossible when you are using an office's computer, software, equipment, services, etc. to come up with further deductions, at least in a legal sense.

Hope this helps.

Agreed with much said here. You have to account for taxes, insurance, etc which is a pretty good chunk of change, depending on where you ar living. Plan on, as emerson said, 25% of each paycheck going into a savings account you forget about. Quarterly payments are a must otherwise you will be assessed a penalty.

Many people claim they can go to town on deductions, but I think the truth is probably closer to the previous example. Don't expect it to be some magically way of retaining every penny you earn. The Feds want your money, employee or contractor, and they will figure out how to get it anyway they can.

I understand why smaller offices go this route. Dealing with all the employee taxes generally means they have to hire an accountant which then is one less architectural staff member they can hire. Also smaller offices (I'm thinking less than 10) sometimes have bigger peaks and valleys with workload, esp. since they tend to have smaller, and therefore shorter, timelined projects...which is all to say they turn over staff a little quicker so it's understandable they again wouldn't want the added expense of an accountant.

Should you be able ask for a higher compensation to cover your added expenses? Yes. Will you actually get a higher compensation to cover said expenses? Probably not.

emerson, I'm prepared to be corrected on this point, but I'm pretty sure commuting IS deductible, but maybe only if you are registered as a business?

My home is my place of business - and yes my accountant is very careful with how we claim a portion of it - and I use one of our family cars for business-related travel only. I suppose it doesn't count as "commuting" if I'm going to different clients' job sites every day.

Since I'm a business, of course, I also claim every piece of copy paper, ink cartridge, etc. that I use, and yes if I was working in an office those would all be supplied by my employer.

I think that goes to archie's point that if you're in an office every day using their equipment and working on their premises you are, more truthfully, an employee, and the firm might just be trying to save themselves some money by getting around that definition.

You're right about the dates - it's the 15th not the 1st. Which is good as I haven't paid my first quarter as of today.

Donna - I think your situation seems more legitimate and true to the accepted definition of "independent contractor," especially since you work out of your home office. I would imagine such a situation would allow for far more deductions than my scenario, or OP's scenario, for that matter, in which a setting within an office was alluded.

As far as determining "commuting," the IRS makes it quite clear that commuting from your home to a place of work and back is not deductible (even if you are an IC), though I don't know if being incorporated changes that fact.

Donna, I read up a little further on commuting. In having a home office, your "commute" is, according to the IRS, going from your bedroom to your home office (and vice versa). Any mileage accrued after that is considered deductible, which is likely why you enjoy far more deductions than someone who commutes back/forth to a firm on the daily. For this reason alone, I would highly suggest someone negotiating their hourly rates for a contract position consider the mileage involved. If you're traveling 200 miles/week to a contract job, adding $1-2 per hour or a per diem might be prudent, considering that the commute won't be deductible.