I recently made the switch from being a full time W-2 employee at a fortune 100 Company to being a 1099 contractor. This is my first time not being a salaried W-2 employee with benefits. I did a fair amount of research about what to expect prior to leaving my W-2 role, so I will share with you what I found out, what went well, and what I was surprised by.
What are the differences between W-2 and 1099 life? The aforementioned benefits are a big one. Before considering making a switch to 1099 life it’s important to determine how much the benefits from your existing job are worth. Even if you have medical insurance premiums being deducted from your paycheck, it is likely your employer is covering a piece of the total cost. You will want to identify how much that is. You will also want to figure out how much your employer’s 401k matching was worth. It might not seem like a huge benefit since you shouldn’t be touching that money until you are retired (ideally), but it counts as much as any other dollar you make.
Have vacation? Think how much your time is worth. Unless you are fortunate enough or have enough leverage to be able to negotiate vacation into your contract (that is certainly not the norm), any time you take off won’t be paid. You can plan for it and lower you annual salary expectations ahead of time, but now when you take a vacation, you will at least be thinking in the back of your mind: I could have been making money today. Funny how vacations are more enjoyable when you know you are being paid anyway.
Having to buy your own medical insurance is one of the two major differences from being 1099 vs being salaried. Your options will depend on what time of year it is and if you are coming from a salaried job. The first option is COBRA if you are. The advantage of COBRA is you can continue on your existing plan(s). So no real research or comparisons are necessary. The coverage you had yesterday is the same coverage you will have tomorrow. The disadvantage is you are now responsible for the full cost of the coverage, which can be as much as 3-4x the amount you were paying when you were salaried. As a reference, I chose the COBRA option and went from having ~$140 a month deducted from my paycheck to paying slightly over $400 a month.
The other two options for medical insurance are buying from the Heath Insurance Marketplace (if you happen to be within the open enrollment period) or private medical insurance. The Marketplace is fairly straightforward. You go to the website and chose one of the plans available for your state. Depending on what state you are in those options will vary. Private medical insurance is available anytime and is more flexible. Generally you will work with an insurance rep to build a plan that works from you. You will need to do a little more research if you go this route, but if you are planning on staying 1099 for a good period of time it’s the option I’d recommend.
The other major difference between 1099 and full-time – and this is the one that caught me off guard – is you are responsible for paying the full FICA tax. What I didn’t know is that when you are a salaried employee, your company is actually responsible for paying half of the FICA tax. What that means is your social security and medicare taxes are going to double. So if you paid 8k in SS plus Medicare taxes for your job, and your salary remains the same, you are going to be paying 16k in SS plus Medicare as an independent contractor. This is a KEY point when you are considering what hourly rate you will accept. Just because you are making more nominally does not mean your take home will be higher.
Companies will not withhold taxes for 1099 contractors. You better be good at planning otherwise you are going to find yourself deep in a hole. That $8,000 paycheck isn’t really $8,000. You need to make sure you are calculating your expected taxes and setting that money aside. The good (or bad) news is you won’t be waiting until the following April to settle up with Uncle Sam. Since you do not have any taxes being withheld, you are responsible for paying taxes quarterly.
One final thing to think about is the impact on your career of choosing the 1099 route. This one likely falls into the neutral bucket. Especially this day and age. On one end you don’t really have to worry about office politics (as much). You are there to do a job. You should still be building relationships – and being 1099 sometimes helps with this as you won’t be seen as a threat. You will miss out on years of the job perks, but those are becoming more and more few and far between. Consulting does generally look good on your resume, so depending on what want to do with your career it can be a positive.