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Q: 1099 Contractor vs. Full Time Employee (FTE) Salary - Take Home Comparison ( Answered,   2 Comments )
Subject: 1099 Contractor vs. Full Time Employee (FTE) Salary - Take Home Comparison
Category: Business and Money > Employment
Asked by: jbadg-ga
List Price: $25.00
Posted: 28 Nov 2006 21:26 PST
Expires: 28 Dec 2006 21:26 PST
Question ID: 786423
Which of the following scenarios would result in the greatest end of
year take home compensation for an employee?  Please include the
estimates take home for both scenarios

1 - 1099 Contractor Paid $166,400 with the following:
> Contractor is paid the hourly rate of $80
> Contractor will work 2080 hours this year
> Contractor will NOT write of any expenses or take tax deductions
(this is not realistic, but I included this assumption for simplicity)
> Contractor and employer are both in Los Angeles, CA

2 - Full Time Employee Paid $120,000with the following:
> $120,000 salary
> $20,000 bonus
> Contractor and employer are both in Los Angeles, CA
> Employer will pay medical and dental insurance
Subject: Re: 1099 Contractor vs. Full Time Employee (FTE) Salary - Take Home Comparison
Answered By: taxmama-ga on 04 Dec 2006 09:51 PST
Dear jbadg-ga,

First of all, let me point out some things that are important
for your to take info account. 

1) Being self-employed in the City of Los Angeles means 
paying for a business license based on gross revenues.

You don't say what kind of business this is, so assuming it's a
professional business, the City of LA tax would be about $900.
See Fund/Class L190 - the tax is $5.73 per $1,000 of income 
over $18,000 + $103.

2) The FICA limit in 2007 will be based on wages of $97,500.
So the first $97,500 will cost $14,918 (15.3%). 
The balance of the $166,400 will cost $1,791 just for the 
Medicare portion - for a total of $16,709. 
As an employee - the boss would have paid half of this - or $8354.50.

3) You do not spell out the cost/value of the medical and dental insurance.
But rayalaska-ga makes a good point about the cost being much higher if you
pay it yourself. Figure for a single person, the best deal you're going to 
get for comparable coverage is about $350 per month - or $4,200.

4) Being on your own, you do not get the coverage for or unemployment. 
So, if the contract ends, you're totally out of luck. 

5) However, you do save the SDI that would have been withheld from
your paycheck - 79,418 x .8% = ( $635 ). 
Of course. You could choose to sign up for self-employed coverage.
That would cost you 2.25% of the same limit of $79,418 = 1787.
(That's only an extra $1,152 more than if you had a job.)

6) None of these costs are deductions on your Schedule C. Half the
Self-employment taxes will be used to reduce your total income.

7) You don't tell us if you're single or married, so I will assume you 
are single. Nor if you rent or own property, so I will assume you rent.

8) Your state of California income taxes are apt to be about $13,000.
Which will be deductible on your Federal tax return.

9) So, taking all that into account, you can expect your IRS taxable
income to be about $142,000 (rounded). So your taxes will be about

Total taxes (rounded)?

IRS             $34000
CA               13000
FICA/MEDI        16700
SDI self-emp      1800
Health Ins        4200
City of LA         900

Total - $70,600

Now, what's if you're an employee in the same situation, earning $140,000?

Your state of California taxes will be around $10,500

Your Federal taxable income will be around $124,000, so your IRS taxes
would be around $29,000

Total taxes (rounded)

IRS       $29,000
CA         10,500
FICA/MEDI   8,400 (employee's share)
SDI           600 (employee's share)

Total taxes    $48,500

Net effect? You potentially come out about $4,300 ahead being self-employed.
A lot will depend on medical coverage.

Of course, this does not take into account what you lose for not getting
paid vacations, sick days or holidays. Losing just 10 days makes being
self-employed about $2100 less attractive.

It does not include any benefits from the company's retirement plan 
contributions and other benefits employees get. 

Personally, I'd want to get a much larger differential before
I would consider going self-employed. You're actually better off, financially,
being an employee. You may have other considerations, but...

I hope this helps.

Best wishes,

Your TaxMama-ga
Subject: Re: 1099 Contractor vs. Full Time Employee (FTE) Salary - Take Home Comparison
From: rayalaska-ga on 29 Nov 2006 00:20 PST
While not doing the complete calculation and going through all the
schedules required one can easilly see that you would make more as a
take home compensation under the contractor scenario. Your bonus is
subject to California 9.3% rates and you are in both scenarios in
California's highest tax bracket.
Schedule SE that you would need to complete as a contractor provides
for a deduction for 1/2 of self employment taxes. These are taxes that
you pay that your employer would pay normally. They are an extra 1.45%
on medicare for the entire $166,400 of income and for the first
94,200$ an extra 6.2%. Even if those would be taken to the fullest
ammount and no deduction would be permited you would only lose
That would still not get you anywhere near close the $120.000+20.000$
bonus for your employment situation. A gross estimate would be a
$12-$15k higher take home pay as a contractor. What you must consider
in here in the end is the value of the dental and health insurance. It
all depends on the coverage and how much the payments for it would
actually be. If you are getting really good insurance it might be
beneficial to you to be an employee. A $500 monthly insurance under an
employee contract's group plan can easilly top $1000 monthly if
insured independtly. Hope this helps.
Subject: Re: 1099 Contractor vs. Full Time Employee (FTE) Salary - Take Home Comparison
From: ubiquity-ga on 29 Nov 2006 14:11 PST
You can form whatever relationship you want with your contract
employee.  You can also disclaim or indemnify whatever you want. (In
other words, you can freely contract with whomever you want andcall
them whatever you want.)

That being said, the question of independant contractor vs employee
does have tax implications.  What you call the employee is irrelevant.
 It is the task performed and level of control that determies who is
an employee vs an independant contractor.


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