Hourly pay with no benefits - how does this work?

[Nika]

One of the companies courting DH offered an hourly position at a rate that is well within our target range. They don't like to hire people on for the first 6 months as full employees with benefits. He'll be working for a sub for first 6 month, than hired on directly by a prime on a gov. contract.

They will pay about $3,800 (taxable) per month extra in lieu of benefits. Obamacare should cost around 2K. The rest of the money should offset federal holidays that he won't be working, a day off if absolutely necessary, and we will put some in retirement.

What should we be aware of when considering the offer?
Are obamacare premiums tax deductible? Or is only amount over 10% of our income is deductible?
Would cobra be tax deductible? Which would be better? Obama care platinum plan or fed health insurance?

Any other tax implications I should be aware of?

Would we have retirement options besides ROTH for that period?

[disneysteve]

Which would be better? Obama care platinum plan or fed health insurance?

I would expect that the Federal plan would be cheaper and offer better coverage but it shouldn't be hard to compare when the time comes.

[Like2Plan]

Would you be using COBRA from your spouses’ previous employer during the waiting period?
I re-read your post. It doesn’t look like he will actually be a govt worker which is what he would have to be in order to get govt health insurance. But, the new company will most likely offer a heath plan. Can you get a link to their web site to see if you can get more information on the benefits they offer?

[TexasHusker]

Will your husband be working FOR a sub contractor or AS a sub contractor?

[~bs]

You'll need to pay self employment taxes, which is around 14.5%. You can write off certain expenses relating to that period of time, although I dont know if it's worth doing for 6 months. If your state has sales tax/excise tax, your gross earnings may be subject to it. Depends on your state. Being subject to a sales tax off the top really sucks, I can tell you that much.

In general, you'd want maybe 25% more in income if working as an independent contractor, as it has no benefits and additional tax liability. Not to mention additional paperwork. It's much easier to just get a W-2 at the end of the year. If you are unfamiliar with preparation of tax return info as an IC, you might want to retain a tax professional or do some research.

making people ICs initially for 6 months might be easier for the company, but also understand, there is significant financial benefit for them to do so. Say if an average employee works 2 years, that means for 1/4 of the time, they paid zero benefits and substantially less in salaries (due to taxes being footed by the IC instead of the company). How much less? Again, back of the envelope guesstimate is 25%.

Back when I was working part time on the side for an old employer, I asked for a $4/hour increase to my pay because of the issues above. They still saved money off me because they didn't have to pay any benefits. Not to mention, the time I put in was all "good time", unlike the staff they had working 70-80 hours/week.

[snafu]

While it ultimately worked out ok, DH's experience was your 'on' every second your 'on the clock', no down time. Initially, some protocols/procedures takes longer as they operate slightly differently/use different terminology/layouts, resulting in working 'off the clock' to complete the assignment. There can be some snide remarks as anyone who perceives themselves 'a weak link' feels threatened if you have qualifications as a replacement...especially in gossipy, government culture.

[TexasHusker]

A company that is requiring folks to be independent contractors before hiring them is likely violating labor law, and is begging for a payroll tax audit. They would likely find that these ICs are in fact employees and fine the company for penalties, interest, and unpaid payroll taxes.

Companies CANNOT arbitrarily classify folks as independent contractors. The federal guidelines are very narrow on this. There isn’t much wiggle room, and penalties are STIFF.

[~bs]

A company that is requiring folks to be independent contractors before hiring them is likely violating labor law, and is begging for a payroll tax audit. They would likely find that these ICs are in fact employees and fine the company for penalties, interest, and unpaid payroll taxes.

Companies CANNOT arbitrarily classify folks as independent contractors. The federal guidelines are very narrow on this. There isn’t much wiggle room, and penalties are STIFF.

That's a good point. There is a checklist i believe, which a company uses to correctly classify people as ICs or not. If essentially, your ICs are exactly the same as your employees, then you're correct.

It actually seems like they're using this policy to take advantage of unsuspecting workers, probably with the excuse that it represents some sort of probation period.

[dczech09]

A company that is requiring folks to be independent contractors before hiring them is likely violating labor law, and is begging for a payroll tax audit. They would likely find that these ICs are in fact employees and fine the company for penalties, interest, and unpaid payroll taxes.

Companies CANNOT arbitrarily classify folks as independent contractors. The federal guidelines are very narrow on this. There isn’t much wiggle room, and penalties are STIFF.

Companies try to do this all the time - they call someone a "subcontractor" when really they are an employee who does not have tax withholding. These companies get into BIG trouble once the IRS, state unemployment, and/or insurance company catches on. States set the rules when it comes to what is considered an "employee" and what is considered an "independent contractor." Employers do not decide this, as much as they like to think they do.

Each state has their own criteria for independent contractor status. It is usually between 8 to 9 different criteria.

This company is asking for a payroll tax audit, an unemployment investigation, and size-able bill on their workers comp insurance. When they are caught (not if), your DH's job could be jeopardized as the company could find themselves between a rock and a hard place, financially.

I would be VERY cautious about this job opportunity. Maybe he needs to go back to the company and demand that he be an employee, or he will walk away. Then again, does he want to be employed by a company on such shaky ground? He should warn the employer that they are violating labor laws, tax laws, unemployment laws, and could find themselves in hot water. They may not believe him and may laugh him off, but at least he can have a clean conscience.

Sadly, many companies do this with no intentions other than trying to save a few bucks. But they do this without first investigating the legal nature surrounding employment. Usually there is no malice intent, and for all we know, the employer could be completely unaware of these facts. However, the IRS, state, and insurance company will not care. Not knowing the law is no excuse for breaking the law.

Side Note: I am a training manager for a large insurance company and work in business insurance operations. I know a thing or two about this stuff.

[Smallsteps]

In reading the original post OP states that first six months they would be working for a sub- contractor. This is a very common practice in my area simply because it is a try before you buy situation.
So many (big name) employers (at least in my area) now hire like this because it is easier to have the placement/ temp agency get rid of problem people before they are offered full benefit permanent position.
The biggest rule in this is a time limit that someone can be working like this before the company needs to make an offer or cut them loose.

[TexasHusker]

In reading the original post OP states that first six months they would be working for a sub- contractor. This is a very common practice in my area simply because it is a try before you buy situation.
So many (big name) employers (at least in my area) now hire like this because it is easier to have the placement/ temp agency get rid of problem people before they are offered full benefit permanent position.
The biggest rule in this is a time limit that someone can be working like this before the company needs to make an offer or cut them loose.

Agree, that’s why I asked the question of whether he will be working FOR a subcontractor or AS a subcontractor. I don’t think that was clarified, and that’s an important piece of info.

[dczech09]

In reading the original post OP states that first six months they would be working for a sub- contractor. This is a very common practice in my area simply because it is a try before you buy situation.
So many (big name) employers (at least in my area) now hire like this because it is easier to have the placement/ temp agency get rid of problem people before they are offered full benefit permanent position.
The biggest rule in this is a time limit that someone can be working like this before the company needs to make an offer or cut them loose.

In some areas it may be a common practice, but it does not mean it is "legit." The IRS and state unemployment agencies are cracking down on this.

Even if the OP's DH worked FOR a subcontractor for a six month probationary period, they would have to be an employee of the subcontractor. However, the title of the thread is "Hourly pay with no benefits - how does this work?" Sounds like DH would be getting paid hourly without benefits. Other parts of this thread imply no withholding either.

Let's hope it is DH working FOR a subcontractor. But even if that is the case, how are they not an employee of the subcontractor? It will be very important for the OP and DH to understand everything about this opportunity and ensure that it is in their best interest.

[Gailete]

They will pay about $3,800 (taxable) per month extra in lieu of benefits.

Interesting, I've never heard of that. I don't know how that comes out on the company payroll cost, but giving taxable money to offset benefits that an employee should get and aren't neccearily taxable is also shaky ground depending on how much tax that $22,800 will push your income into. You will also need to be paying your own short and long term policy and if he has usually had life insurance via his company he will have to buy that as well. He will need to be making SS $ MC payments (the full amount not just half with the employer picking up half) which should run somewhere around $3400/6 months. To cover all the benefits that he won't be getting, from his pay scale, I doubt that there will be much left over at all.

So lets see:

SS/MC = $3400
Federal/state/local taxes, taking a guess of 30% = $ 6840
Health insurance (not clear if you meant $2K for the 6 months or per month)= $12000
(If the health insurance is per month, that will be a big problem, if for the whole 6 months it would run about $333/month. I know before his discount, my husbands cost was almost $500/month which is why I', guessing it is $2000/month.)

Obviously these numbers are guesstimates but if they are anywhere close, you will be left with about $46/month for short and long term disability, days off, retirement. Of course I assume that he gets paid regular wages so some of that could be covered that way.

If a person is getting paid to be an independent contractor and he only works for one company daily 40H/week AND the company is covering his 'benefits' at an extra cost, that just doesn't sound like an independent contractor. My last job I was a contracted employee, that another company technically hired us and paid us our wages and sent us W2s at the end of the year. Independent contractors get 1099s. and when their job is done at one place they go elsewhere.

[Nika]

To clarify, with more info:

He would not be an independent contractor, he would be an hourly employee of a recruitment company(a large one), just with no benefits.

After 6 month, he has option to be hired on directly by the prime contractor(very large defense contractor), at a currently agreed upon salary or to stay on hourly at a higher rate. Recruitment company says they do it all the time and the process is seamless.

That position, pretty senior with lots of specialized knowledge has been a challenge to recruit for. They have been trying for a while, and contractor is loosing money because even though they have the contract, they can't charge anything unless their person is there, working the hours.

We could get gov. employee health insurance by requesting leave without pay for this time. We would have to pay both the government portion and our portion (around $1,800 per month, similar price to obamacare plans) In dh's organization leave with no pay is usually granted when good employees leave. Because if someone leaves, the organization looses the position. The position goes back to HQ, and they have to fight to get it back and it may not happen. So if an employee is good, they tend to grant leave without pay on a chance the employee does not like new job and wants to return in a few months. And recruiting in that field is a big challenge for them, as the pay they can offer is much lower than private industry.