Can an employee become a consultant?
Q. I have been working for the last 1/2 year for a small company. I was getting paid like most normal businesses, with taxes taken directly out of my paycheck. We have now moved to a new location and have a new Business name, and to save $, my boss wants to pay me as a "consultant" and pay me my gross salary, of which I will have to pay my own taxes. He is willing to cover the extra social security taxes that a "consultant" normally has to pay. However, every accountant I have talked to has said that this is a bad idea and besides losing $, I could get in trouble with the IRS. Also, I will get no unemployment insurance, health, etc if I am a consultant. At first he gave me a choice and once I chose to not be a consultant, because of all of these reasons, he changed his mind and he basically said that I can either quit or accept this. I want to know, is what he is doing illegal, and can I sue him?
A. Your boss is doing what a lot of companies are doing -- eliminating the cost of providing benefits by either downsizing or outsourcing. For instance, some companies hire long-term temps from an agency, rather than hire a secretary, so that the company doesn't have to provide benefits, or worry about personnel (HR) issues. With a temp, and with a consultant, if you don't like the work, or if you don't need the worker, you simply terminate them, or elect not to renew the contract.
It's perfectly legal to do this, by the way. Generally, the accountants are right that it's not necessarily a financially beneficial to be a consultant, but I don't think you'll get in trouble with the IRS if you set yourself up correctly. I could be wrong, so you'll want to sit down with an accountant or tax attorney you trust to explain the pros and cons to you.
It's not always a disadvantage to the employee who turns consultant if you know how to protect yourself. First, as a consultant, rather than an employee, you'll be considered "self-employed" by the IRS, and will get a 1099 at the end of the year, rather than a W-2. As a result, you'll have to pay self-employment taxes in addition to regular income taxes. That's just one of the many tax issues you'll face. You definitely want to consult with an accountant or a tax attorney to sort through the issues you'll be facing. However, you can offset these costs by increasing your hourly consultant's rate to your former employer. Lock everything down a nice tight contract, which you'll title "Consulting Agreement." Set out your hourly rate, the number of hours you work, and even the specific hours you'll work. Hey, if your former boss is giving you lemons, may as well make lemonade. For instance, if he wants a consultant, rather than an employee, then consult on your terms, at hours that are more convenient for you while still getting the job done for your client/former boss.
As for health benefits and such, you'll have to shop around for a company that provides them to self-employed individuals. They're out there; you've just go to find them.
By the way, technically, what your former boss has done is, in essence, fired you and then offered to retain you as a consultant (assuming he's paying you as a consultant now). If he's still paying you as an employee, and then terminates you because you won't agree to be a consultant, you may be entitled to unemployment benefits. I'm not suggesting that you should pursue this option; you can probably get a better deal with a good consulting agreement. However, if the former boss doesn't agree, you might consider exploring these issues with the State.
The other thing you can do, depending on the nature of your job, is to farm your talents out to a temp agency. You may be able to find a long term temp assignment as a .... well, whatever it is you do. Many temp agencies provide benefits after you've worked a certain number of hours for them, and temp work also gives you the opportunity to try on different kinds of office settings.
Good luck. You can make the best of a bad situation if you put your mind to it.
A. Your boss is doing what a lot of companies are doing -- eliminating the cost of providing benefits by either downsizing or outsourcing. For instance, some companies hire long-term temps from an agency, rather than hire a secretary, so that the company doesn't have to provide benefits, or worry about personnel (HR) issues. With a temp, and with a consultant, if you don't like the work, or if you don't need the worker, you simply terminate them, or elect not to renew the contract.
It's perfectly legal to do this, by the way. Generally, the accountants are right that it's not necessarily a financially beneficial to be a consultant, but I don't think you'll get in trouble with the IRS if you set yourself up correctly. I could be wrong, so you'll want to sit down with an accountant or tax attorney you trust to explain the pros and cons to you.
It's not always a disadvantage to the employee who turns consultant if you know how to protect yourself. First, as a consultant, rather than an employee, you'll be considered "self-employed" by the IRS, and will get a 1099 at the end of the year, rather than a W-2. As a result, you'll have to pay self-employment taxes in addition to regular income taxes. That's just one of the many tax issues you'll face. You definitely want to consult with an accountant or a tax attorney to sort through the issues you'll be facing. However, you can offset these costs by increasing your hourly consultant's rate to your former employer. Lock everything down a nice tight contract, which you'll title "Consulting Agreement." Set out your hourly rate, the number of hours you work, and even the specific hours you'll work. Hey, if your former boss is giving you lemons, may as well make lemonade. For instance, if he wants a consultant, rather than an employee, then consult on your terms, at hours that are more convenient for you while still getting the job done for your client/former boss.
As for health benefits and such, you'll have to shop around for a company that provides them to self-employed individuals. They're out there; you've just go to find them.
By the way, technically, what your former boss has done is, in essence, fired you and then offered to retain you as a consultant (assuming he's paying you as a consultant now). If he's still paying you as an employee, and then terminates you because you won't agree to be a consultant, you may be entitled to unemployment benefits. I'm not suggesting that you should pursue this option; you can probably get a better deal with a good consulting agreement. However, if the former boss doesn't agree, you might consider exploring these issues with the State.
The other thing you can do, depending on the nature of your job, is to farm your talents out to a temp agency. You may be able to find a long term temp assignment as a .... well, whatever it is you do. Many temp agencies provide benefits after you've worked a certain number of hours for them, and temp work also gives you the opportunity to try on different kinds of office settings.
Good luck. You can make the best of a bad situation if you put your mind to it.
posted by David Kendall at
10:58 PM
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