Freelance or Employee (better or worse)?

[Zatour]

Hey guys,

I was recently offered a choice with a new employer and I am not sure how to respond. The employer is willing to work with me to ensure that I am getting the same net pay and has offered for me to be either a part-time employee or to freelance for them. The thing is that we are in different states - NE (me) & CO (them). I'm not looking for benefits from them, just the pay. 

This would be less than 24,000 a year (net). 

How do I go about finding out the benefits of either option? 

[ErnieS0]

If you are self-employed, the IRS considers you to be operating a "business," meaning your are responsible for your own taxes. Unlike an employee, you can claim business deductions.

On $24,000 of income, you would pay income tax plus $3,391 of self-employment tax (Social Security and Medicare).

The IRS allows you do deduct half the amount of self-employment tax ($1,696) against your income. There is also a qualified business income deduction of $4,461.

You can claim business expenses, such as a home office and equipment. Any business expenses will reduce your taxes. See: The ultimate guide to tax deductions for the self-employed.

The deductions sound like a great deal—and they are—but many self-employed persons don't make quarterly tax payments or save any money for taxes. As a result, they end up owing a lot of money at tax time, which they cannot pay. They get onto an IRS payment plan and keep paying taxes for years afterwards.

You can use Taxcaster to estimate how you will do. Enter your income as W-2 and then try it again as self-employed.

[Opus 17]

That’s probably not actually legal. The determination of whether you are an employee or an independent contractor should be made based on your duties and the relationship between you and the employer, and it is not really subject to negotiation unless you are negotiating the entire package—not just your wage but also how your work will be controlled and what your duties are.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

For example, as an employee, you might be paid a certain amount per hour or per month regardless of how long it takes you to finish a particular task. As a contractor, you might be paid by the task regardless of how long it takes. If you can complete the task faster than the company expects, you should receive the same amount of pay and you should be able to use that free time to freelance for another employer. 

Just considering employment taxes, you would need at least 15% more as a self-employed contractor than your base salary would be as an employee. However, you may want to include additional compensation to make up for the fact that you are not receiving paid vacation, or subsidized medical insurance, or an employer match to a retirement plan or pension.  At my particular employer, the value of all my benefits is considered to be an additional 40% on the top of my gross salary. There is no right answer, it depends on what you can negotiate for yourself.

[Zatour]

Thank you for your insights. 

[Opus 17]

One more thing. Under both arrangements, the employer can reimburse you for legitimate work related expenses on a tax-free basis, as long as you provide adequate proof of the nature of the expense.  If you have unreimbursed work related expenses, you can subtract them from your gross income as a contractor but you cannot deduct them as a W-2 employee.  If the work you will be doing is likely to require that you provide significant amounts of supplies or materials, then reimbursement for the materials should be included in your contract negotiations.