More Money, More Problems. Or, Best way to have a full-time and part-time job with freelance opportunites.

February 8, 2007 2:21 PM

Getting a new full-time job, might get to keep the old one. What are the better options from a financial/legal standpoint?

Though I'm currently employed by Company A, I've been offered a position a Company B that I will accept. However, given the nature of web development and the overloaded development schedule at Company A, I am 100% sure that they will ask me to work for them on a part-time basis even after I leave them for full-time employment at Company B.

What is the best scenario for me with regards to tax liability? If I am being paid what will amount to another paycheck per month for my part-time work with Company A, what are the disadvantages to me to remain on the payroll vs. becoming a contractor? I assume the latter option comes with some additional headache, but if I could start my own business and shelter the additional liability this way, then I'm open to that as well.

Note: In California. Full-time pay is in 60k range for both companies. Let's not discuss whether or not I am crazy in assuming that Company A will make any type of offer. I'm here for advice based on personal experience (before I go see an Accountant on Monday).

Note #2: Let's buck a trend here; I know most will not be lawyers/accountants, so IANAL/A won't be necessary.

posted by littlelebowskiurbanachiever to work & money (6 comments total)

You sure as hell better tell Company B that Company A is still employing you. Double dipping without everyone agreeing is a great way to get fired.
posted by mcstayinskool at 2:42 PM on February 8, 2007

I worked as a contractor for about a year, and it really isn't that big a deal. If you make enough (not sure about the amounts), the federal gov. wants you to make estimated tax payments every quarter. The other downside is that since you are really your own employer, you have to pay more social security taxes as compared w/ being a regular employee. If possible stay on the payroll just to avoid having to go to all the hassle of setting up and maintaining the financial structures involved with being a contractor.
posted by cschneid at 2:47 PM on February 8, 2007

freelance work will cost you about a third in taxes, so take the gig at company b and offer company a freelance on a daily rate that takes that into account. make sure company b knows about this or you're in trouble.

my take: 60k for a web developer means you're getting shafted.
posted by krautland at 3:11 PM on February 8, 2007

The reason why I'm leaving Company A is because I am getting shafted. Company B, with a comparable base, is also heavily-incentive based, and if I end up being a good little drone, the number should increase.

Company B is aware of the remaining opportunity of Company A, and while they're not doing backflips about it, they're onboard.

I had assumed that being a contractor would cost more money, but would also allow me to ask for more in return, since they won't be footing the payroll costs. I guess this is where I am again/still confused, on if the additional financial benefits of being a contractor are worth the headache.
posted by littlelebowskiurbanachiever at 4:23 PM on February 8, 2007

If you get health care and any other benfits you need through your new employer then you will almost certainly be better off just being a contractor for your present employer. Being a contractor will allow you to ask for more, approx the cost of your current salary +benefits + other overhead is probably the max they are willing to pay you. This could be anywhere from 20-90% increase over your current hourly rate depending on the company. figure out that amount as a starting point for negotiation.

When you do your math remember that setting up your own business comes with some significant tax benefits too, but your accountant will know about that. Plus if you do good work you can move on to doing freelance for people who pay more!
posted by fshgrl at 4:32 PM on February 8, 2007

Even without becoming a contractor, you could probably get them to give you the money they'd otherwise spend on health care benefits. You could write an employment contract that says you voluntarily declined those benefits, then negotiate for that amount to be added to your salary. (We just did that with a part-timer where I work now.)

Besides money, there is a fundamental difference. You are running your own business, with the associated freedom, hassle, and risk:

* Doing taxes as a contractor becomes a lot more complicated. This can end up a serious mess. One friend of mine ended up in debt to the IRS for 2 years. Everyone I talked to who was a first-time contractor was a bit overwhelmed by having quadrupled the amount they had to think about their taxes. But if you can deal proactively with all that (save receipts, think about what is deductible, etc.) or if you already itemize a bunch of stuff, you'll probably do great.

* There is extra freedom to being a contractor. (Depending on your contract) they generally can't expect you to keep a schedule, or do work in a specific location, and you can subcontract the actual work-work and take a cut for managing it.

* But you typically have to provide your own equipment. So if your computer gets a virus and you have to reinstall everything, it's on your time not theirs. But then you get to deduct all those expenses (your digital camera, printer, computer, car maybe, continuing education classes, etc). (See: "complicated taxes" above.)

* Also, (and again depending on the contract), there's usually more liability for you as a contractor. Both malpractice-type liability (if you crash their webpage and they sue you for lost income) and workers compensation / disability liability (say, if you get totally disabled from carpal tunnel, as an employee, an employer would probably cover it but as a contractor they wouldn't). Will you want to carry insurance for this?

* You might also want to ask your accountant about retirement accounts. If you're doubling your salary, you'll probably want to tax shield as much as possible. I have this vague idea that you can put a lot more in 401K or 403B employment accounts than in personal IRAs. But I could totally be wrong here.

All in all, if you're interested in all these running-a-business kind of details (contracts, deductions, liability) and want to learn how to manipulate them to your advantage, you'll probably like being a contractor. If your eyes glazed over and you just want to get paid, I'd stay on as an employee.

Either way, I'd factor more of an increase in salary than just the actual taxes + benefits, because you'll be taking onto yourself both time liability (negotiating a contract, fixing your computer) and financial risk. I heard last week from a friend who earns ~$65K (doing something different than web dev) that all contractors doing her job bill out at $80/hour. So the contractor wage was 250% of the salaried wage (versus the 120%-190% suggested above). (But I'm sure there's a ton of variation -- I got a raise above what I was being paid as a contractor when I became an employee.)

Congrats on your new job!
posted by salvia at 2:33 PM on February 9, 2007