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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1084
Experience:  US Taxation specialist.
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I work as a full time employee of a software consulting company

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I work as a full time employee of a software consulting company (company located in CA ) at their client site location (Project location of client in MN) . My gross annual salary with my employer company (irrespective of what my employer company gets hourly rate from the client for my services at client location) is $120K with 10 days paid holidays in a year and medical insurance contribution.

Now , i have an offer from the client company to directly join them on the rate of $90 per hour (8 hrs per day / five days a week) as a contractor by forming my own LLC or S-Corp . My employer company also has no objection with this . Now , please clarify the below doubts in detail :

(1) Which option is more beneficial to me i.e., Gross $120K per year with 10 days paid holidays & Medical Insurance or $90 per hour X 8 hrs per day X 5 Days a week without any paid holidays or insurance because i will work as contractor through my own LLC ?

(2) If i join as a contractor on hourly rate through my own LLC or S-Corp , how much approximately will be my tax liability to deduct from my monthly income and what will i get in my hand actually because as an full time employee i get pay check of $7150 per month in my hand after deducting all federal , MN State taxes , Social Security Tax and Medicare , etc. from my gross pay ?

(3) As an contractor , i will have to take my & my family's medical insurance on my own . Any idea about how much approximate will it be per month for me , my spouse and one kid for a good medical insurance ?

(4) Any idea about approximate how much time will it take to form LLC or S-Corp and start to join as contractor with the current client if i choose to join the client directly leaving my full time position with my employer company ?
Submitted: 1 year ago.
Category: Tax
Expert:  USTaxAdvising replied 1 year ago.

Hello,

Thank you for using justanswer. I can assist you with your salary questions today.

 

(1) Which option is more beneficial to me i.e., Gross $120K per year with 10 days paid holidays & Medical Insurance or $90 per hour X 8 hrs per day X 5 Days a week without any paid holidays or insurance because i will work as contractor through my own LLC ? - $90/hr will give approximately $187,200K annually (that's assuming a 2,080hr work year). This is $15,600 monthly. You will take home close to $9,300 monthly (Fed Tax $2,857, Self Employment taxes of $2,386 & MN tax of $963) This does not take into account any health insurance which would also be used as a deduction to reduce Self Employment tax. So you earn close to 7,150 now so you could be looking at a $2,244 monthly increase (w/o health insurance). Seems like the S-corp would be more beneficial as you can escape some self employment taxes with this choice of entity.

 

2) If i join as a contractor on hourly rate through my own LLC or S-Corp , how much approximately will be my tax liability to deduct from my monthly income and what will i get in my hand actually because as an full time employee i get pay check of $7150 per month in my hand after deducting all federal , MN State taxes , Social Security Tax and Medicare , etc. from my gross pay ? - I think I answered this above. Let me know if something is not clear.

 

(3) As an contractor , i will have to take my & my family's medical insurance on my own . Any idea about how much approximate will it be per month for me , my spouse and one kid for a good medical insurance ? - You could be looking at insurance between $500 to $2,000 monthly. You would have to get a quote to see what it will cost based on your needs.

 

(4) Any idea about approximate how much time will it take to form LLC or S-Corp and start to join as contractor with the current client if i choose to join the client directly leaving my full time position with my employer company ? - You can form an LLC or S-corp online in most states. Delaware can be done online. You will be up and running in a few days.

 

I hope this provides some answers to assist you in making a decision. I think the independent contractor would be more beneficial from a financial perspective but there are risks from being an independent contractor (i.e. you aren't protected by state employment laws).

 

Please let me know if you have any further questions.

 

Best regards,

 

Customer: replied 1 year ago.

Thanks , please clarify the below :


 


(1) Will there be no Social Security Tax deduction if i work as a contractor because as a full time employee , i see social security tax deduction in my monthly pay ? Then how will i be eligible for social security benefits later in my life if working through my LLC or S-Corp ?


 


(2) As you advised that there are risks from being an independent contractor (i.e. you aren't protected by state employment laws) , what is this protection if i am an employee and will not i get if work through my LLC or S-Corp ?


 


(3) Are there any guidelines or points to keep in mind to discuss with my employer company or the client company while making this decision of leaving my current employer company and joining the client company through my own LLC or S-Corp ?


 


(4) Any basic difference and a good point on which i can decide either to form LLC or S-Corp ? Can LLC be changed to S-Corp and vice - versa later if i want to do this status chage after some time once i have now formed LLC or S-Corp ?


 


 

Expert:  USTaxAdvising replied 1 year ago.

Hello,

 

(1) Will there be no Social Security Tax deduction if i work as a contractor because as a full time employee , i see social security tax deduction in my monthly pay ? Then how will i be eligible for social security benefits later in my life if working through my LLC or S-Corp ? - The self employment tax is the social security and medicare. Basically, when you are self employed, you pay both the employee and the employer portion. You get a deduction for the "employer"portion and it is not subject to fed/state taxation.

 

(2) As you advised that there are risks from being an independent contractor (i.e. you aren't protected by state employment laws) , what is this protection if i am an employee and will not i get if work through my LLC or S-Corp ? - Well things like potential wrongful dismissal. If you were an employee and felt you were wrongfully terminated then you may have recourse through the courts. As a contractor, if they terminate your contract or don't renew it, your out (there would be no recourse). Other benefits would be workers compensation, disability, etc.

 

(3) Are there any guidelines or points to keep in mind to discuss with my employer company or the client company while making this decision of leaving my current employer company and joining the client company through my own LLC or S-Corp ? - I can't think of any "guidelines" per se. Just clear honest, open communication and have everything written down and documented. Contracts must be written and not verbal.

 

(4) Any basic difference and a good point on which i can decide either to form LLC or S-Corp ? Can LLC be changed to S-Corp and vice - versa later if i want to do this status change after some time once i have now formed LLC or S-Corp ? - Yes you can change from LLC to S-Corp later if you wish or vice versa. Here is a good chart that summarizes the key differences between each entity. http://www.orr-reno.com/uploads/pdfs/EntityChoiceMatrix.pdf

Here is another good one - http://www.companiesinc.com/incorporate/entity-comparison-chart.asp

 

I hope this helps. Please let me know if you have any further questions.

 

Best regards,

 

 

 

 

 

 

Expert:  USTaxAdvising replied 1 year ago.

Hello,

 

Just following up. Please let me know if you have any further questions or if I can clear something up for you.

 

If I have answered your questions and you are satisfied please accept or rate my answers.

 

Thanks for your time.

 

Best regards,

USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1084
Experience: US Taxation specialist.
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