YOu should consider making your byline to "Real savings are realized when
it's done right the first time"
-C
----- Original Message -----
From: "Robert M. Pritchett" <EGroups@...>
To: "Discussion Group" <RMPCP-Member-Discussions@YahooGroups.com>;
"Applicants List" <RMPCP-Applicants@YahooGroups.com>; "ICCA DFW Chapter"
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Sent: Friday, August 15, 2003 4:44 PM
Subject: [ProgrammerCoOps] (disc) Understanding Payroll/SS/SE taxes and W-2
vs. 1099/corp. and broker's cuts


> I thought that this article might help explain things to those less
> experienced in these matters. Those of you who are old pros, please excuse
the
> repetition (but it might make a good refresher). This is very simplified
and
> ignores rate caps, benefits and other deductible expenses, unemployment
and
> state taxes, and other complications, and it's approximate; its purpose is
> just to explain the basic concept.
>
>
> The 7.65% Socialist inSecurity tax (FICA/OASDI/MediCare) is paid by both
> employer and employee. Self-employed pay both halves (15.3%). This is why
you
> need to quote a bit higher rate to get the same amount if you're an
> Independent Contractor (whether incorporated or self-employed).
>
> It so happens that 7.65% is very close to 1/13, so here's an
approximation.
>
> If you're an employee, for every $13/hr. of your rate, the employer and
> employee halves of the SS tax are $1/hr. each, so your employer is paying
> $14/hr., and you're really getting $12/hr. But you have to pay income tax
on
> the $13/hr.
>
> If you're 1099 (self-employed), you need to quote $14/hr., because you
have to
> pay both halves = $2/hr., leaving you the same $12/hr. To make it work the
> same way as for employers, you get to deduct the employer half of the
> Self-Employment tax, or $1/hr., so again, you pay income tax on $13/hr.
>
> If you're incorporated, it works like both of the above examples combined.
> Normally you're an employee of your corp., so again, you need to quote
> $14/hr., your corp. as employer will pay $1/hr. out of that leaving you a
> $13/hr. wage as employee, you pay $1/hr. out of that, leaving you the same
> $12/hr. And again, you pay income tax on the same $13/hr.
>
> The next example I mention to complete the comparison, and because some
people
> asked about it and were confused.
>
> If you're working through RMPCP on our 1099, we bill the same $14/hr. and
you
> get the same $12/hr. That's why our 15% "umbrella fee" does not compare
with
> the 3-5% fee charged by other umbrellas, because ours includes that $2/hr.
> you'd have to pay anyway, and other umbrellas' quoted fees do not - apples
vs.
> oranges. Thus, our real fee is 15% - 2/14 = about 0.7%. And because we
handle
> the $2/hr. difference instead of you, you only have to pay income tax on
the
> remaining $12/hr., not $13/hr., so our fee is effectively more like 0.4%.
So
> that's why some people were confused and think we charge more, but
actually we
> charge less.
>
>
> Again, this analysis skips the complications mentioned above, but it
should
> explain the situation clearly enough for a starting point. Now you know
why
> you need to quote about 8% more as an IC to get the same amount, and why
this
> doesn't cost the broker/client any more than they'd pay as an employer (in
> fact, possibly less). That's also why when you're working through RMPCP,
you
> can quote about the same rate you'd normally quote as a 1099/corp. and
still
> get the same amount left; we effectively don't add anything to the cost.
>
>
> Another way to compare this is the general rule of thumb that seems to be
> floating around, that a good broker will take 20% of the bill rate if
you're
> 1099/corp. or 30% if you're W-2. This assumes that the broker found you
the
> client, as usual, so it includes their commission. Again, this is only
> approximate.
>
> If the broker is taking 20% and giving you 80% on 1099 or corp-to-corp,
> they're taking a 20% commission. After you pay your 15% SE tax (or your
corp
> and you split 15% in payroll taxes) of your 80%, that's 15% * 80% = 12%,
thus
> a total of 20% + 12% = 32% taken out, leaving you 68%. We're assuming no
> factoring for 1099/corp as they probably don't pay you until the client
pays
> them. OK, maybe they're doing some invoicing and maybe some factoring,
worth
> about 1%, so their commission is effectively about 19%. So, if you're an
IC
> and the broker takes 20%, you're really getting 68% of the bill rate after
SS
> taxes.
>
> If you're W-2, they're taking 20% + 10%, about 4% of which is their
factoring
> fee for paying you regularly and (hopefully) unconditionally as their
> employee, and about 6% of which is the employer half of FICA etc., leaving
> 70%. Your employee half of about 6% then leaves you with 64%. That's 4%
less
> than the 68% above, the 4% being the factoring fee. Some of the 4% is
probably
> not just for factoring but to compensate the broker for the extra legal
> requirements of being an employer. So as an employee, with the broker
taking
> 30%, you're really getting 64% of the bill rate after SS taxes.
>
> If you're working through RMPCP, there's no commission of course if you
find
> your client yourself, in which case you get 85% of the bill rate -
essentially
> the same 12/14 you'd be left with after paying the SS taxes as in the
first
> analysis above, whether you're W-2, 1099, or corp. If one of our other
> consultants finds the client for you, your fellow consultant (not RMPCP)
gets
> a 10% commission (which declines to 5% after 3 months and 0% after 6 more
> months), so you get 75% (with automatic raises to 85%). If we finally find
and
> hire a good marketing/sales partner which finds the client for you, their
> commission is 10% more (20% declining to 10%), so you get 65% (with
automatic
> raises to 75%). So at worst case, your 65% compares very well with the
64-68%
> above, and then you get automatic raises as our commission declines, while
> typical brokers' commissions hang on forever.
>
> And of course many brokers take far more than the 20%/30% of the bill rate
> above. I had one once that took 35% (instead of 20%) on a 1099, and I've
heard
> even worse.
>
>
> Robert M. Pritchett - RMP Consulting Partners LLC - member ICCA
> Quality means doing it right the first time - http://rmpcp.com
> Tired of hearing "W-2 only"? Work the same contract on our 1099 instead!
> Email Apply at our web site above for more info. Group benefits pending.
> See http://www.keen.com/rmpcp for legal/tax issues facing consultants.
> We are not lawyers/accountants and are not giving legal/tax advice.
>
>
>
>
>
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