Moonlighting as a software developer: employee or independent contractor w/ LLC?

Question

I've made arrangements with a company to do some part time software development help (in addition to my day job, that has full benefits). They are a government contractor (local city governments) and I will be assisting on some of their contracts.

I need to make a decision which is to either:

A. Join their company as a part time employee, fill out W4 like usual and have them withhold taxes.

or

B. Join them as a subcontractor. I would need to register a LLC, get some liability insurance, setup a basic company website.

A is the simplest, but I can also do B. Are there any reason to do option B and setup a LLC? What benefits will I gain?

Note: Having registered LLC, website, liability insurance is a requirement imposed on the company from government due to their contracts.

EDIT: It is not a duplicate of the proposed question. That question is about a person considering switching to being a full time independent contractor, whereas I already have a full time job and I am only doing this on the side.

Answer 1

I've been in a similar situation before. While contracting, sometimes the recruiting agency would allow me to choose between being a W2 employee or invoicing them via Corp-2-Corp. I already had a company set up (S-Corp) but the considerations are similar. Typically the C2C rate was higher than the W2 rate, to account for the extra 7.65% FICA taxes and insurance. But there were a few times where the rate offered was identical, and I still choose C2C because it enabled me to deduct many of my business expenses that I wouldn't have otherwise been able to deduct. In my case the deductions turned out to be greater than the FICA savings.

Your case is slightly different than mine though in that I already had the company set up so my company related costs were "sunk" as far as my decision was concerned. For you though, the yearly costs associated with running the business must be factored in. For example, suppose the following:

• Your yearly business costs (expenses you would not have if the business didn't exists, LLC registration, insurance, accounting, website, etc) are $1500.
• You make $25K per year from your part time job. Your business FICA expenses would be 7.65% = $1913.

Due to these expenses you need to make up $3413 in tax deductions due to the LLC. If your effective tax rate on the extra income is 30%, then your break even point is approximately $8K in deductions (.3*(x+3413)=3413 => x = $7963)

So with those made up numbers, if you have at least $8K in legitimate additional business expenses then it would make sense to form an LLC. Otherwise you'd be better off as a W2.

Other considerations:

1. If you already max out Social Security with your day job, then the numbers change because instead of 7.65% you would only pay 1.45%. Now FICA would reduce to $363 and your would only need at least $4347 in expenses to break even.
2. An advantage of the LLC is if you ever pick up more clients, you're set up and ready to go. Though with a full and part time job already there may not be much time for more clients.