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I’m a full time employee SAP Consultant and thanks to this new recession my employer gave me 2 options: leave the company or become a SUB-Contractor, I don’t know anything related to SUB-Cons, so obviously I have too many questions about it but I like to focus on the most important right now that is (of course) income, the rules I got are simple for any amount billed to the client the company will keep 25% and from the remaining amount the company will also deduct another 15% for employer-taxes, and the remaining amount will be consider my gross salary that will be the base to pay my taxes

Example
- For every ‘$100.00 USD’ billed to the client the company will keep ‘$25.00 USD’ for their margin - From the remaining amount of ‘$75.00 USD’ the company will deduct another ‘$9.75 USD’ as an Employer-Taxes - And the remaining amount of ‘$65.25 USD’ will be consider my gross salary and from there I’ll pay my taxes

So back again to my question, do you think this is a fair agreement?, shouldn't the company be the one who pays for the employer-taxes with their own margin?

Thanks

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  • The 9.75% sounds like they are withholding the employer portion of Social Security, Medicare and unemployment/worker's comp tax. Are you going to be an employee of the contractor or a 1099 contractor? Oct 8, 2011 at 14:19
  • @duffbeer703 That's a good question, because I was under the impression that an employer only pays "employer" taxes if the employee is on payroll (which would require regularly taxes withheld, I thought), and 15% is too high anyway.
    – Nicole
    Oct 8, 2011 at 16:02
  • Is it possible to rewrite this to remove the fairness question, but keeping the core money query about employee, contract, sub-contract? Fairness is far to subjective to be useful...
    – sdg
    Oct 9, 2011 at 1:19

1 Answer 1

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From the description, the 9.75% sounds like they are withholding the employer portion of Social Security, Medicare and unemployment/worker's comp tax.

Are you going to be an employee of the contractor or a 1099 sub-contractor? If you are a 1099, talk to an attorney -- it may better for you to incorporate and handle those taxes yourself.


EDIT

From your comment, it sounds like you are actually going to be a temporary employee. As an employee, you get paid as you work, but your employer takes an extra margin out to cover the costs of paying you every week. The employer may be borrowing money for 60-180 days as it waits for payment.

The upsides are that you get paid predictably, and may have access to cheaper health insurance via a group plan.

The downsides are that you are paying a significant amount of money for that privilege (body shops usually make a profit on this), and it is very difficult to get raises or improved benefits from the employer. (You are only an employee because IRS Regulations say you are -- your "employer" sees you as nothing more than a cash flow.)

In my opinion, these arrangements rarely work in your favor, and I would start looking aggressively for another opportunity once you start doing this.

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  • Thanks Duffbeer & Renesis, and is actually 15% (like Renesis mention), the $9.75 are USD in the $100.00 USD example. Anyhow I'm not really sure but what I understood is the my contractor will treat me as an employee if (and only if) I'm assign to a billable project and as soon as the assignment is over also my benefits and salary are off (like a SUB-Con). Oct 8, 2011 at 22:17
  • @ConsultantZero The upside to you for being a temporary employee to the contractor (vs. a "true" sub-contractor) is that you'll get paid on time. The 15% includes a premium for that. It is not uncommon for big corps or government to pay 90-120 days late. If you're an actual subcontractor, you won't get paid until the contractor does. Oct 9, 2011 at 17:14
  • @ConsultantZero - You should also realize that depending on the status and where you live you may not be eligible for Unemployment benefits in this manner. Generally this tends to work out as the Company you are contracting to thinks of you as an employee of company X. But to Company X you are a work for hire contractor and you would be responsible for all of your benefits. As you are not employed you are not eligible for Unemployment compensation though as an employer you may be required to pay into it. Get A LAWYER. Find out before you sign what you would be getting into.
    – user4127
    Oct 10, 2011 at 18:13
  • If you are going to be a real self employed you need to set your day rate at around 3x you salaried rate
    – Pepone
    Feb 28, 2016 at 14:43

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