Working as a Contract Employee

Are you sitting in your corporate cubicle looking reading those snazzy online ads about high-paying contracting jobs? Or are you glumly staring at your paycheck, post-raise, and wondering why your increased taxes are more than the raise you worked weeks of overtime to get? Contracting can be a step in the right direction, both monetarily and in the development of your career.

First, sit down and think about why contracting appeals to you. Is it the flexibility and relatively short-term nature of the assignments? Is it the increased independence? The money? Or perhaps the ability to build skills your employer won’t give you the opportunity to develop? Write down what reasons are most important to you.

Secondly, take a look at your list of reasons and think about what form of contracting you would like. “Contracting” is often a loosely-used term to apply to both W-2 and 1099 workers. A W-2 worker is technically an employee of the contracting agency they work through, and hence, has to fill out a W-2 tax form just like any full-time employee. The advantages of working via W-2 are that a) depending on your field, most temporary employers prefer this type of arrangement; b) you can build a rapport with one agency while experiencing a variety of work settings and using a variety of skills; and c) work is usually more stable and a bit longer in duration than work through a 1099. The W-2 route is probably the best way to go if you simply want to “shop” for your next full-time job, or want to increase your skill level and then return to full-time employment. On the other hand, working as a 1099 also has advantages, which are: a) you have more flexibility and independence, as you are considered self-employed; and b) because you are running your own business, expenses incurred in marketing yourself and running your business are deductible as business expenses. If you strongly value independence and would rather be self-employed, the 1099 route is most likely for you. If you are still unsure, and have never contracted before, take one W-2 assignment of six months or less. That will give you some experience to evaluate which route to take.

You may be looking at the above paragraph and thinking, “Boy, that’s a fine line.” In fact, there are huge differences between the two statuses.

As a W-2 employee, your agency is your employer, even if you work at their client’s site. Most agencies offer very little in the way of benefits, so you will have to figure in medical, vacation, down time between assignments and other factors into your hourly rate. You will probably work exclusively (or almost exclusively) at your client’s site. Some clients treat their contractors just like employees and try to include them in company picnics and other activities. Other clients treat contractors like second-rate citizens while dolloping benefits and perks on their actual employees. Although you can deduct job-hunting expenses if you itemize your federal income tax, you won’t be able to deduct the cost of commuting to the client site, and it is unlikely that you can justify any home office deductions. You may be hired for a specific set of skills, but will probably be invited to staff meetings, and you may wind up with duties you weren’t planning on, such as reordering office supplies. (This is because the client may really treat your presence as “staff augmentation”; in other words, they temporarily need people and see you as having similar responsibilities as an employee.)

If you decide to take a W-2 contracting position, there are numerous online job boards you can use to begin your search (see below). Depending on your field, you may receive an avalanche of phone calls and emails offering jobs. Even if a job sounds terrific, interview with at least three agencies, if possible. Ask what benefits they offer, if any. Also ask how often you get paid. Some agencies pay as frequently as weekly; others every other week; a few monthly. Also ask whether the position is “temp to hire”, that is, whether the company will consider hiring you as a permanent employee if they like your work. Give your recruiter a chance to tell you about the client company by asking open-ended questions, such as “How would you characterize this company?”, or “Tell me a bit about this company’s culture.” Then listen carefully. Most recruiters work on a commission basis (so they desperately want to get you the contract), but if you’re hoping for casual dress and they describe a “somewhat conservative environment”, it probably isn’t a good fit.

As a 1099 contractor, you are self-employed. You will probably have an office of your own (even if it is a home office) where you do most of your work. You will probably do your own marketing, or enter into a relationship with an ad agency or public relations firm to do your marketing for you. You will pay for all of your medical insurance, retirement and other benefits, but these are often deductible. You will pay all of your own taxes, including social security tax. Expenses incurred while running your office, marketing, etc. are usually legitimate business expenses. Depending on the nature of your business, you may have an hourly rate, a project rate or per diem rate. Also depending on your line of business, you may need to register your business with your city or state and obtain licensing. Consulting with an accountant or tax professional is almost a must. You might also want to contact an attorney regarding the form of self-employment (sole proprietor, corporation, partnership) and any licensing requirements.

The IRS sees these two ways of contracting as vastly different, and has guidelines to determine whether you are an employee (W-2) or independent contractor (1099). These guidelines can be found at: http://www.irs.gov/prod/forms_pubs/pubs/p15a02.htm. They also provide examples from a variety of industries to illustrate the guidelines. As a rule of thumb, you will probably want to be on the conservative side of these guidelines. For example, if you are an independent contractor (1099), and a potential job requires you to be on the client site with set working hours like an employee (W-2), you may want to negotiate to remove the set hours requirement or refuse the work. If you are unsure on a particular contracting situation, consult with your accountant or tax professional.

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