Switching From Employee to Independent Contractor

Question

I've read a few different questions on here regarding the breakdown of employee vs independent contractor, but my situation has details that are quite different, hence, the question.

When I was hired, I was actually offered the choice of Employee or Contractor. At the time, the notion of Contractor scared me a bit so I chose Employee.

My situation is this:

• I work out of my home 100% of the time (my employer office is ~300 miles away)
• I am responsible for all my own tools (computer, office stuff, etc.)
• My employer does NOT offer a matching 401K retirement plan
• My employer subsidizes insurance for me but NOT for my family.
• I pay ~$600/month (POST TAX) for private health insurance for my family (I still pay $150/month for myself).
• I travel to the office of my employer 4 times per year, without reimbursement, for a week, incurring charges of around $600 for the trip. This adds no benefit to my current tax situation.
• I currently have one client that I work with between 5 and 10 hours per week, doing the same type of work, under a sole proprietorship.
• My wife does not work, so we don't have access to any other employer sponsored benefits.

From what I have read, here a few areas where I might benefit from being an independent contractor: (correct me if I am wrong)

• Ability to claim more deductions on my taxes...(i.e. cost of equipment and supplies, cost of trips to their office including rental car, gas and food, potentially other stuff)
• Access to better private insurance plans that can't exclude me or my family for pre-existing conditions.
• Ability to deduct Health Care insurance premiums. (currently $7,200/year)

As you can see, I am going at this primarily for (a) Tax benefits AND (b) Health Care choices. As it stands now, I have limited health insurance choices, risk of coverage being dropped or elevated if something bad happens to one of us, and not having the ability to deduct the health insurance premiums.

I already work a lot, and at odd hours often, so that's not even part of the equation for me. I understand that I'll be responsible for self employment tax, but I think I can get a slightly higher pay rate from my employer to help with that, should I make the change. Additionally, the reduced tax liability from the insurance premiums should help. Lastly, I am a self starter and manage all of the documents/receipts, etc., for my current sole proprietorship, so there won't be much of a transition.

Thoughts?

Answer 1

One thought: get a professional tax adviser to help you. IRS may re-characterize you as an employee even if you're paid as a contractor with 1099, depending on the nature of your work and your relationship with the employer.

However, all your concerns are valid, and you would definitely have more tax benefits as a contractor, under the terms you've described. You should also talk to your adviser about whether being sole-proprietor is good for you. You should consider the benefits of incorporating (for example, working under S-Corp may, if handled properly, reduce your SE-tax liability). Depending on your state, there may be some additional fees and taxes involved, though. See this question for a related discussion.

My answer was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer (circ 230 disclaimer).