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.
Benefits
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 also want to figure out how much your employer’s 401k matching was worth.
Have vacation? Think about how much your time is worth. Unless you are fortunate enough to negotiate paid vacation into your contract (that is certainly not the norm), any time you take off won’t be paid.
Medical Insurance
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 whether you are coming from a salaried job. The first option is COBRA — you can continue on your existing plan with the same coverage you had yesterday. The disadvantage is you are now responsible for the full cost, which can be as much as 3-4x the amount you were paying when 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 Health Insurance Marketplace (if you happen to be within the open enrollment period) or private medical insurance. If you are planning on staying 1099 for a good period of time, private medical insurance is the option I’d recommend as it is available anytime and is more flexible.
FICA Tax — The Big Surprise
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. 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 as an employee, 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.
Companies will not withhold taxes for 1099 contractors. Since you do not have any taxes being withheld, you are responsible for paying taxes quarterly. That $8,000 paycheck isn’t really $8,000. You need to be calculating your expected taxes and setting that money aside.
Career Impact
The impact on your career of choosing the 1099 route 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. Consulting does generally look good on your resume, so depending on what you want to do with your career it can be a positive.