Seeking advice on switching from an employee to a contractor.

September 27, 2010 12:07 PM

I would like to discuss with my boss the possibility of moving from full-time employee status to contractor. My primary question is about health insurance, though I have some more general questions as well.

I work full-time as a grant writer for a non-profit. I no longer feel that it's necessary for me to be here, on-site, for 40 hours a week, and would like to talk to my boss about switching to contractor status. This would allow me to work from home as well as take on some additional clients.

Questions:

1) Health Insurance. I now get health insurance through the group plan at my NPO. I would need to switch to a cheaper health plan if I went to contractor status, and would of course need to acquire it independently. My main concern is that I have a 'pre-existing' condition, which I take daily medication for. What is the current status on health care legislation regarding so-called pre-existing conditions? Will I be able to continue getting coverage for my condition if I switch providers? Is there anything else I should know about this?

2) I would likely file as an LLC. Good idea or bad?

3) If my income from the NPO stayed basically the same, would my taxes change drastically from becoming self-employed?

4) Any advice for the best ways to present this idea to my boss? Basically I want to present to her the idea that I would essentially do the same amount of work for the organization, and would thereby expect to stay at the same 'salary,' but it would be cheaper for them since they wouldn't have to pay my benefits, they'd have more office space etc. I would suggest that I could come in for a weekly meeting with all the necessary people to touch base.

5) Does anyone have experience with this and have specific advice or anecdotes that could aid me in trying to make this happen?

I've worked for this NPO for 2.5 years, and we're located in Oregon.


Thanks much AskMe!!

posted by Lutoslawski to work & money (18 answers total)

Why not just go part-time for the organization? Or ask to switch to telecommuting?

3) If you're self-employed, you'll have to pay the "self-employment tax" which basically means since your employer is no longer contributing to social security and medicare for you, you have to pay it. You should increase your "salary" by at least this amount.

4) Sure, the organization doesn't have to pay for your benefits, but you're claiming that you'll do the same amount of work? Is this small increase in flexibility for you worth the increased costs and hassle? As a self-employed person, you will not get as good a deal on health insurance as your organization does for the "group". If you were going to make this move, they should pay you your salary multiplied by the amount that your taxes will increase (see above), plus how much money they pay for your benefits (or how much money it will cost you to replicate a similar benefits package).
posted by polexa at 12:16 PM on September 27, 2010 [1 favorite]

1) They are still allowed to deny you coverage for pre-existing conditions. And, judging from my experience, they absolutely still will. Unless you live in a state with a high risk pool, you will be screwed.

2) No idea.

3) Yes, your taxes will change drastically and your real income will go down quite a bit. You will be in charge of your social security and other taxes. This is really a huge deal, and can act like a 30% pay cut depending on your location. (I don't know about Oregon, but a work colleague of mine did this and it was about a 35% cut for him.)

4) Companies love contractors because it saves them about 50% on costs associated with the person. You should have no problem presenting this to your boss, unless it's a very meat in seats organization.

5) Why do you want to be a contractor instead of working from home as an employee? They get some of the same benefits (and you could even take a 10% pay cut and it would still be a better deal for You), and you don't have to deal with taxes, etc. Not only that, if your duties aren't changing, it's likely that you can not be changed over to an independent contractor. There are pretty strict rules about who qualifies as a contractor and who must be accounted for as an employee. Simply beginning to work from home doesn't bump you from one category to the other.
posted by stoneweaver at 12:17 PM on September 27, 2010

I have talked with tax folks and lawyers about #2 and the answer has consistently been that the only reason to file as an LLC is liability protection. I'm would guess there probably isn't a lot of liability risk in the grantwriting business, in which case it's unlikely you need to be an LLC.

#3: You need to pay self-employment tax if you're self-employed. This basically means that you pay 100% of payroll taxes instead of the 50% you pay as an employee, or an extra 7.5% (approximately) on self employment income. At least it's deductible...
posted by phoenixy at 12:18 PM on September 27, 2010

Have you considered going from full-time to part-time instead, and maybe pick up some of the cost of your current employer-supplied insurance? That way you could still telecommute and pick up additional work on the side as a freelancer.

A good friend changed from employee to contractor a few years ago. This was for a Florida employer and he works for them remotely in another state. As an individual with no pre-existing conditions, his health insurance is expensive with a high deductible and lots of things not covered, and his self-employment taxes are killing him. Like you he is a writer so he doesn't have many business expenses, and as far as I can tell the most consistent advice he is getting from his financial advisor is "spend more so you can write it off."
posted by headnsouth at 12:22 PM on September 27, 2010

stoneweaver: 1) They are still allowed to deny you coverage for pre-existing conditions. And, judging from my experience, they absolutely still will. Unless you live in a state with a high risk pool, you will be screwed.

All states have a federally funded high risk pool as part of health care reform (that is separate from any high risk pools they may have had previously); some states have set them up already and some have not. However, in most states, in order to qualify, you must have been previously without insurance for 6 months. (This is true for many high risk pool plans as well.)
posted by MCMikeNamara at 12:33 PM on September 27, 2010 [1 favorite]

(previously existing state high risk pool plans, I mean)
posted by MCMikeNamara at 12:34 PM on September 27, 2010

I went through something similar recently. I was researching taking a job as a contractor vs. waiting for a job somewhere where I could get group insurance. I have a pre-existing condition and while it is not life-threatening, the medication that I take for it is pretty expensive. I was calling around trying to get information. One insurance broker (the only one who did not cop out and say "well you'd have to apply and then we'd let you know) said that the good news was that I wouldn't be denied coverage but the bad news was it likely that they would attach a rider to deny any coverage for anything related to my pre-existing condition. My friend who has something off with her thyroid just finished with COBRA and had to look into getting private insurance. After grilling her over that condition and and doctors appointments that she's had over the last 2-3 years, she did get coverage (but if I recall correctly it will not cover anything related to her thyroid condition and there is a $5000/per year deductible).

I really doubt that you're going to be able to find any non-group insurance that cheaper than what you can get at work (or at least not anything good if you actually have to use it). I'd agree that rather than contracting, you should ask about telecommuting.
posted by kaybdc at 12:34 PM on September 27, 2010 [1 favorite]

From someone who has worked as a contractor from home, some notes:

(1) You will lose money if you do this. This is virtually assured. Yes, your taxes will change drastically; they will increase, probably quite a bit. I went from working at $20 an hour as an employee to working at $20 an hour as a contractor; my taxes nearly doubled.

(2) Health insurance: you almost certainly have difficulty finding insurance at all, never mind as affordable as what you have now. Rules governing pre-existing conditions don't change for (I am fairly certain) another few years; I know they're still allowed to deny on pre-existing conditions now. I never had health insurance when I was a contractor, because I applied with four different insurance companies and every single one denied me for having a pre-existing condition. My pre-existing condition? I have ADD. Apparently that was enough to make me uninsurable. I don't know what your pre-existing condition is, but I'm willing to bet that it's "worse" in the eyes of insurance companies. And even if I'd gotten insurance, it would have set me back at least $300-$400 a month. This differs a lot from state to state, and I don't know exactly how things are in Oregon, but my feeling is that this will be very difficult for you.

(3) Keep in mind that, within certain limits, it is not your decision or your employer's decision whether you can be classed as a contractor. The IRS is the sole decision-maker regarding contractor status; and while you have to formally ask them to make a real decision, they have guidelines about what being a contractor means. They include: varying hours; no direct working command structure; a fixed contract for a limited amount of time; and a more tentative approach to whether you're likely to continue with the company. You don't necessarily have to satisfy all of those requirements, but with due respect your desired situation sounds nothing like a contractor position. Now, this isn't a liability at all for you; if the IRS decides that you're in fact not a contractor at all, you won't have to pay any money to the IRS or get penalized in any way. Your employer will.

I think I understand the gist of what you're proposing – you'd like shorter hours, and you'd like to work from home, so you're thinking of offering them the 'bargaining chip' of letting them class you as a contractor. I think you need to know, though, that that would essentially be a lie. "Contractor" doesn't mean "has fewer hours and works from home." You can be just as much an employee in those situations as you are working in an office. (Believe me – as someone who worked from home as a "contractor" who was really an employee. But it wouldn't have helped me to protest that, since I was working for a non-profit, too, and complaint from me would've just ended up with a reduction in my hours, or complete layoff, anyway.)

My suggestion would be to completely put contracting out of your mind. Your idea might be a great one for you; but letting your company lie by classing you as a contractor is a bad idea. A better one would be to offer to take a pay cut and give up your insurance.
posted by koeselitz at 1:01 PM on September 27, 2010 [2 favorites]

Sorry, I meant "take a pay cut and not give up your insurance."
posted by koeselitz at 1:09 PM on September 27, 2010

I came to say "it is not your decision or your employer's decision whether you can be classed as a contractor", but koeselitz already said it. See here.

You want to work part time (say 80% of FTE?) and to work from home. Why not just make the case that you can be productive etc that way?
posted by serazin at 1:29 PM on September 27, 2010

Hey everyone! Thanks for all the incredibly good advice. I'm glad I asked this question before pursuing this because, clearly, I have much to learn about what I'd be getting myself into.

Part of the problem here is that the ED of the NPO is pretty anti-working from home (for unclear reasons). It's true that most positions here couldn't really telecommute, but the nature of my work is definitely conducive to that. I basically just sit at the computer all day as it is and never talk to anyone.

Actually, asking to move to 80% of FTE, to work from home, take a pay cut but keep my insurance perhaps isn't a bad idea. Any advice on broaching that idea?

Again, thanks to everyone. Great advice.
posted by Lutoslawski at 1:55 PM on September 27, 2010

You don't have to be a contractor to work from home, you can telecommute as a salaried employee with benefits. Why don't you ask if you can try working from home a few days a week, for a trial period of a month, just to see how it goes? If you both agree that went well, step it up to more days/week.
posted by Jacqueline at 3:19 PM on September 27, 2010

You might to tackle the telecommuting part first and then the part-time second. A trial period sounds like a good idea. Emphasize the unique nature of your job and that doing this for you does not mean anyone else would qualify. Also, can you do a weekly productivity report that summarizes everything that you got done (lots of details) that would assure your ED that you are really working? If ED likes face time with people, any chance he/she might be willing to skype you when there is a question that you need to answer while you are offsite?

Also, promising the same volume of work in 20% fewer hours seems foolish to me - either you aren't working hard enough now or (more likely) you are setting yourself for unpaid overtime. If you need to go to 80% time, try to find a distinct piece of your job that can delegated to someone else so that you really do have less work.
posted by metahawk at 3:39 PM on September 27, 2010

I like the idea of posing a trial period so the boss doesn't feel panicked about being stuck with what s/he imagines is a terrible scenario of you being at home.

I'd suggest looking around online for advice about asking for a raise. I think the principles will be the same. Basically, you want to make an appointment and then approach the boss in a confident, unapologetic manner. Clearly and simply state your proposal. Explain without defensiveness why your proposal will benefit the organization (increased productivity perhaps?), and why your work history demonstrates you are responsible and able to carry out this new work arrangement without taking away from your performance. If the boss says no, ask, "What would you like to see happen in order for you to feel comfortable doing this on a trial basis?"
posted by serazin at 3:51 PM on September 27, 2010

An additional piece of potential leverage - mention that as a writer, you need the office quieter than it is currently, and moving to a home environment would allow you to do better work because there are fewer distractions.
posted by stoneweaver at 9:53 PM on September 27, 2010 [1 favorite]

Fantastic advice everyone. Thank you. I'm going to sit on all of this for a few days and I will come back and update as I start to figure out what to do.

At this point, asking for a work-from-home trial period sounds like maybe my best bet. I know the thing I'll run up against is the ED - and not even because of face-time, she's just kinda old-school in that way. I don't think my direct boss would have problem with it.

Again, thanks to everyone. You guys are the greatest.
posted by Lutoslawski at 8:34 AM on September 28, 2010

It was pointed out to me that I may have been unclear in my advice and I wanted to clarify what I meant about high risk pools. As part of the Affordable Care Act, adults with pre-existing conditions are eligible to join a temporary (until the health care exchange in 2014) federally funded high-risk pools.

However, since these the states were given the opportunity to administer them, these are at various levels of actual existence. Some states like Oklahoma, New Mexico, and Oregon (where the original questioner is, I believe, from) chose to set them up like their existing high risk pool plans and went live with them 7/1 or 8/1. Others - like here in Illinois - are administering them differently than there pre-existing state plans but the state is still administering them. Many, many more are "opting out" which does not mean they will not have them -- just that the states have opted not to administer them -- which means the Department of HHS has had to figure out how they are going to do it.

I'm sure that doesn't really clarify it at all - except to say that it's, at best, confusing, and because of the 6 months of non-coverage required for it, I wouldn't recommend it for your situation anyway (which is what I was trying to, but failing to, originally make clear.)
posted by MCMikeNamara at 9:05 AM on September 28, 2010

Tim Ferriss's book, The 4 Hour Work Week, has lots of specific suggestions about how to convince your employer to let you work from home. There is some ridiculous hype around that book, but that is one section I think you should read carefully.
posted by HighTechUnderpants at 11:17 AM on September 29, 2010 [1 favorite]