What are the risks/benefits of being an independant consultant?

Question

I am currently a full-time employee with full benefits, 401k, the works. My boss asked if I wanted to become a contractor. I know by saying yes I would lose my benefits, paid vacations, etc. But my pay would increase to compensate for it. Is it worth it? I don't even know how much more to ask for. Is a 20% increase enough? 25%? I'm 40 and single so its just me I have to worry about.

Answer 1

You will probably need considerably more than a 25% increase in pay to equal your current net salary and benefits. Just the self-employed (independent contractor) social security and medicare tax is 15.3%, all of which you will have to pay, after taxes. If your employer is making matching contributions to your 401K, then you should add that amount to any increase. Also, the company match is tax deferred, but any increase in your pay will not be tax deferred. As mentioned, private health insurance can be very costly, so you should get an estimate of this to add to your request for increased pay. All in all, it would probably not be to your advantage to become a contractor, unless the increase in pay is considerable.

Answer 2

Your boss is asking to reduce his costs, such as payroll taxes (social security).

When you're a contractor, you have to pay social security tax yourself.  There's no withholding, so you'll have to pay "estimated" tax payments quarterly.

Good luck getting health coverage without being in a group.

Also -- your workload, and thus your payments, can become uneven.