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I'm an Italian consultant in the IT field, and I'd like to know what are the differences between being a consultant or an employee in the USA in respect to the same differences in Italy. I've already found a question about the difference in the USA between the two situations, but it's totally opinion base while I'm mostly interested on the fiscal aspects of it.

So, to set a reference frame, in Italy:

  1. An employee get paid regularly each month, for 13 or 14 times a year (plus one more, but don't want to complicate matters too much)
  2. Its monthly gross wage always includes healt insurance and retirement.
  3. Has a month of payed leaves each year (for holidays)
  4. Has no fiscal benefits (to simplify a bit)

The drawback is that even keeping into account all the benefits, its yearly gross is usually lower than a consultant's one.

A consultant on the other hand has no benefits nor regular incomes (if I get ill, I stay home and gain no money; if I go a week on holiday, nobody pays me, etc. etc.), but has a lot of fiscal benefits; mainly he can detracts lot of expenses from its yearly gross, like

  • house rent
  • car related costs (buying/renting/leasing, fuel, maintenance, insurance, etc. etc.)
  • working tools expenses (a PC, for example)
  • clothes
  • cellphones
  • restaurants

and many more. Given that a consultant is usually paid more -up the last year laws didn't allow a company to fire an employee, so companies where willing to pay more for a consultant as it was a disposable and flexible resource-, lot of detractions usually help to raise the wage.

So, what it is the fiscal difference between being a consultant and an employee in the USA, keeping as a reference/example the above differences in Italy?


Edit

Just a few bits of additional information, 'cause as I'm giving a view on being a consultant in Italy I don't want to fool the occasional reader. All the above applies to my specific kind of consulting, there are many small and big differences between various kind of consulting that are not relevant for me in this context, and I didn't report a few possible drawbacks, namely (and again, simplifying a lot):

  • all kind of consultants pay taxes ("plain" and retirement ones) a year in advance, on their estimated income for the next year
  • some kind of consultants have to pay retirement taxes even if they have no income
  • you are supposed to gain a certain amount of money (too complicate to explain here)

Again, this edit is just for general information purpouse, is not relevant for the question itself.

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    There is no tax rule difference; income tax is calculated from your income, and the same income results in the same income tax, no matter what type of employment. As a consultant, you might be required to prepay income tax during the year (for employees, the employer does that automatically). Also, as a consultant, you might have other deduction options that employees don't have. – Aganju Jul 28 '16 at 11:13
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    @Aganju: There is a tax difference, in that (assuming the consultant is an independent contractor) they will have to pay the "self-employment tax" (i.e., employer's half of the payroll tax). – BrenBarn Jul 28 '16 at 16:04
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Couple of points about being a consultant in the US:

  • It sounds like the rules for what you can deduct may be more lax in Italy. For example, you can deduct a certain percentage of your home for work but the rules are relatively strict on your use of that space and how much is deductible. Also things like clothes, restaurants, phones, car use, etc must follow IRS guidelines to be deductible. This often means they are used exclusively for work and are required for work. A meal you eat by yourself is not generally deductible, for example. Any expense you would have had anyway if you were not working is generally not deductible.

  • A contractor in the US can organize in various ways, including sole proprietorship, an S-corp, and a C-corp. Each has different tax and regulatory implications. In the simple case of a sole proprietorship, one must pay not only regular income tax but also self-employment tax, which is the part of social security and medicare tax normally paid for by one's employer. Estimated taxes must be paid to the government quarterly and then the actual amount due synced up at the end of the year (with the government sending you the difference or vice versa).

  • Generally speaking contractors may set aside more money pre-tax for retirement and have better investment options. This is because solo 401(k) retirement accounts are cost-effective and flexible and the contractor can set aside the full $18K pre-tax as well as having the company contribute generously (pre-tax) to the retirement account. Contractors can also easily employ spouses and set aside even more.

The details of how frequently you are paid as a contractor and how much notice (if any) the company must give you before terminating your relationship are negotiated between you and the company and are generally pretty flexible. You could get paid your whole year salary in a lump sum if you wanted. The company that is paying you will not normally give you any benefits whatsoever...in this way it is the same situation as it is in Italy.

By the way the three points you mention in your edit are definitely not true in the US.

  • about the deduction in Italy...after reading the IRS guidelines, I think they are quite similar even if yes, they are a bit more lax here. On the other hand they are balanced by the last point in my edit: to make it short, the government has statistics about how much people doing each job type gain and spend. When you do your yearly declaration you are verified against those stats and your expenses put you in a range which your gains must fall inside. If you are outside...you will pay taxes as if you were inside :-) – motoDrizzt Aug 14 '16 at 8:09

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