So I’m not asking for any actual binding legal/financial advice, but I’m trying to figure out how to compare a salary offer and a contract position (all other factors being the same.)
I’m trying to figure out what factors I need to take into account when calculating the overall compensation package of the salary position, and whether it would compensate for the difference in actual take-home pay… some of the things I can think of are:
- 401(k) with matching
- profit sharing
- paid holidays
- health, dental, vision benefits
- commuter checks
I don’t know how income tax or other tax concerns stack up between the salaried and the self-employed. Honestly, that seems like it could be a big concern, if there’s some kind of weird tax thing I’m not remembering to take into account…
Can anyone with experience in this tell me what I might be forgetting to take into account in trying to compare these two packages?
My last company used to tell us that benefits, which included a very good profit sharing plan, was about one third again our compensation. Or if you made $100 then an extra $33 was in benefits. Since that was a bit of a sales pitch, that might have been hyped but not too much. Newer employees got a bit less, older employees a bit more. And benefits like health care cost more when you buy them on your own versus pooled with a company. So it makes a good rule of thumb.
As for taxes, the main difference would be you’re responsible for both sides of FICA, FUTA and SUTA. Roughly 15-20% of your salary.
So, net, I’d look at $100/hour salary as the equivalent of $150/hour contracting. (Nice easy numbers, not necessarily dead on accurate)
[Standard disclaimers about taking advice from a stranger on the internet apply]
So the 15-20% FICA, FUTA, and SUTA are on top of the normal income tax percentage?
(not taking this as legally binding information, etc)
I may be wrong, but I’m pretty sure as a contractor you are not obligated to pay FUTA or SUTA (unemployment insurance).
The biggest difference tax-wise is in Social Security and Medicare taxes. As an employee, you pay 6.2% of your gross income for Social Security and 1.45% for Medicare (total 7.65% of salary). The employer pays the same amount, so you are splitting the cost 50/50. As a self-employed contractor you have to pay the entire 15.3% yourself.
If you will be working as a contractor through a placement agency, check with them. Some agencies will give you the option of being a 1099 contractor or a W-2 employee for the agency. Being on a W-2 will lower your hourly rate, but then they will take care of withholding taxes and pay the 50% of SS/Medicare for you.