What’s the breakdown on taxes an independent contracter has to pay?
I live in Kansas, and I recently received a direct contract offer from my company for $17/hr, whereas right now I’m contracting through another company and getting a take-home of a bit under $12/hr. How much take-home am I losing?
You can’t compare take home (net, after taxes) to gross. You can compare gross to gross. You will pay 7.65% more for social security/medicare, plus you have to figure out the value of benefits you receive from your current job compared to what you will get on your contract (typically, nothing).
Benefits? Whatever are those? 
This is the same position, all they’re doing is cutting the middleman. My current net is $11.67/hr (at 22.175% taxes), the gross they’re offerring is $17/hr… so, if it’s an additional 7.65% then my new net will be… $11.92, I think. Not so bad, I suppose. At least no loss to me on that front.
What about insurance? Who pays your expenses etc?
Insurance? What insurance? I assume that liability insurance is covered either by the customer company or the contracting agency; I don’t GET any benefits - the contracting agency offers me a group dicount on health insurance, but it’s still too expensive for me. Welcome to basic contracting.
Collections are often a problem, getting your money after you have finished a job can be a real pain in the ass. It’s not the same as if you are working for someone that has to make payroll.
You are also liable for the competence of the job and following the agreed upon time constraints. A picky client can withhold payment or sue for damages for any number of petty reasons. Be advised I am only thinking in terms of electrical/mechanical contracting.
I’m sure the current company is paying at least double your going rate to your employer. I’d counter with an offer of $20/hour. One thing you might be able to do as an independent contractor is deduct certain expenses that you may or may not receive as a sub-contracted employee. Check with your (an) accountant.
There are benefits, even though you don’t see them. As an employee, your employee is paying the full Social Security and Medicare, Workers’ Compensation and Unemployment Insurance. I don’t know the state laws in Kansas, but I’m pretty sure that all those things are being paid.
If the company gives you the equivalent amount of money, you’ll be taxed on it, so you need a grossed-up amount.
That is to say:
AS AN EMPLOYEE, if you’re currently earning $100.00 (to make the calculations easy), and you pay taxes (let’s say at 20%, for easy calculations) so let’s say $20 in income taxes and $7.65 for Social Security. So, from the $100, your net take-home is $71.35.
The company is paying $7.65 for Social Security and Medical, plus some amounts – let’s say another $3.00 – for Workers’ Compensation and Unemployment Insurance.
AS A CONTRACT EMPLOYEE, if they pay you the additional $10.65 so that you’re now making $110.65, then you’ve been screwed. You pay taxes at 20% on the full $110.65, so you’re now paying $23.30 in taxes, plus $15.30 (= 2 x $7.65) for Social Security, and if you’re lucky, you can get insurances to replace Workers’ Comp and Unemployment Insurance for the same $3. So you’re down an extra $3.30 in your net pay.
The deductions on my check are:
Fed tax: 11.16%
FICA: 7.65%
State: 3.35%
No further breakdown has been provided for me. Obviously, Social Security and Medicare are being paid, I’m not certain about Worker’s Comp, and there is to the best of my knowledge no Unemployment Insurance. This is through an established company, so I assume it to be legal.
I’ve not been naive to accept such terms, but rather desparate. RIght now I’m trying to find out specific numbers to evaluate the alternate offer given to me.
You cannot be an independent contractor and be paid by the hour. If you are paid by the hour you meet one of the crucial criteria to be considered an employee and that’s what the government will consider you to be.
An independent contractor is contracted for a job and he is pretty much free to do the job as he pleases. If the person hiring you can dictate your hours and how you do your job, then you are an employee and saying you are an independent contractor is going to be seen as a way of cheating. The government takes a dim view of this.
You should consult a lawyer who is knowledgeable about this are of the law.
I’ve suspected as much, myself.
For fairly obvious reasons I can’t really afford to consult a lawyer on the matter; my intent is to wait to get it in writing and then see which gov’t agency I should talk to. This is fishy on a great many levels - apparently my current contracting agency hadn’t heard of the contract ending and this would also be a violation of the non-compete clause in our agreement.
You can find plenty of info on the Internet and it is a much better resort to find specialized information on the Net than to rely on advice from people who may have the best of intentions but do not have a clue about the subject matter.
There is a widely circulated list of 20 check points used by the IRS.
You can’t just call yourself an independent contractor. Either you are or you aren’t. BTW, an amployerr can fire an employee but you cannot fire a contractor if he is doing his job. If you contract a guy to build an addition to your house and he is performing his part of the contract you cannot fire him half way through the job without penalty.
I’m sure that lawyers who charge their clients $250 per hour will be excited to learn that they are actually employees. 
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But make sure he doesn’t charge you an hourly rate – otherwise you’ll have to withhold social security and stuff
Kidding! Kidding!!
The 20 questions
This 160 page, PDF, IRS document has more than you will ever need to know with detailed explanations and examples of every question.
lucwarm, there is an exception in the IRS code for lawyers and hookers who can charge by the hour and still be independent contractors because they sell themselves to many clients. In fact, a lawyer who only works for one client would be an employee (in-house lawyer) but a woman who has sex with only one man is called a… I can’t remember the word right now but I think it begins with W.
And, yes, I am kidding too _
To be clear, I do very much believe that as the contract is currently offerred it is an employee position and not an independent contractor position. I am following that via other avenues - thank you very much for the links. Rest assured, however, that I won’t accept this as it stands since I, too, am convinced it is not valid.
What I’ve been trying to determine, however, is how much gross I would need in order to match my current net. That is if current gross - current taxes = current net; then I want to find what my new gross should be where new gross - new taxes = current net. I’ve loooked online and had a very difficult time finding out what my new taxes will be.
Around here contract service providers charge by the hour and for material (time and material), or they bid the job as an all-inclusive total (hard money).
Either way they usually give us an estimate before work starts.
Maybe I don’t understand sailor’s assertions.
Lawyers do not have any special exception - they are mentioned merely as an example of professions that charge by the hourly rather than fixed fee. It would be very misleading to say that independent contractors are paid fixed price and employees are hourly (as your first post indicates) as there are many people who are normally paid hourly. In my industry, software development, it is very common for contractors to be paid hourly.
the Feds are very interested in catching companies that try to avoid Workers’ Comp, Unemployment Insurance, Labor Law, etc by just renaming employees as “outside contractors.” The list of 20 questions referenced by sailor above provides the guidelines that are used to try to determine whether a particular situation is a true “independent contractor” or is really just a mis-named employee.
Hasufin, I don’t know your line of business, but here in the UK, as a contractor, I had to take out liability insurance. As your own boss, you are responsible for everything, and that includes covering your backside. If I had bollixed a server leaving a department unable to work for a day, my client would have wanted compensation. Damages could have easily topped £1M. So I had insurance.
Oh yes, as my own boss, the Inland Revenue wanted properly auditted accounts, so I had to employ accountants - who clued me into all sorts of things and were well worth their fee - at additional cost.
A rule of thumb in the UK is that a contractor should charge at least twice the hourly rate of a salaried employee.