How to calculate my real earnings from hourly temp-to-hire moving to salaried employee?
"Get some professional accounting help. You're going to have to pay for everything out of the fee you charge: taxes, retirement, health care, etc. You'll be required to pay quarterly. I don't think you should base your fee on what ""this"" company will pay as a full-time employee, but what you can expect in your area. They're saving a lot of money not going through an established employment firm and essentially, making you create your own. There are costs to setting up and maintaining a company. They have less risk hiring you because there are no unemployment consequences for letting you go.  Once you're hired, they'll probably put you on salary, so you can forget about making more money if you work over 40 hrs. IMHO - there have to be better jobs in your area than this one." "This arrangement is a scam to get around certain tax and benefits laws, both State and Federal. I know they can't get away with this with a person-as-contractor, but this ""he's not a contractor, he's a business owner"" may move it into a gray area. (I used to know this stuff cold, but I've been retired for a while.) The fact that they asked you to do this is at all is, IMNSHO, a Red Flag®. They think that this way they won't be paying 1/2 your FICA, your Workman's Comp, health insurance, overtime, sick leave or vacation time ... you will. A somewhat simplistic rule of thumb for setting contracting rates is to take your targeted annual salary as a full-time, full-benefits employee and double it. So $50,000 becomes $100,000 a year; $25/hour becomes $50/hour. You can tell them that driving to their workplace from your company's location is now a ""site visit"" and charge them your hourly rate for the one-way commute time. You could also tell them that your company charges 150% for hours worked over 40 hours/week, plus 150% on Saturdays and 200% on Sundays. Your company may also have a minimum 30 days notice of termination with a penalty kicker. Get it all in writing and signed by someone who has the authority to sign it. Also, Get A Lawyer. The most expensive contracts I've ever signed were ones I thought I was smart enough to draw up myself." "Here's an alternative. There are hundreds, maybe thousands, of contract engineering firms (""job shops"") in the United States, probably hundreds in California alone.  They are in the business of doing what your ""employer"" wants you to do, they know how to do it, they have been doing it for decades, working with the biggest, most-established companies in the country.  They have forgotten more about providing engineering services to clients, and paying the engineers, than you can learn in a lifetime. Call a few of them.  Set up meetings.  Budget a few hours for it.  You want to talk with the most experienced recruiter in the office, the Old Guy Who Has Been There And Done That.  Explain your situation, and tell them that, rather than go through all of the headaches yourself, you want to investigate the possibility of THEM handling all the headaches, for their usual markup of course.  (You can probably word this better than I can, but you get the idea.) The shop may or may not be willing to talk about their markup.  My personal opinion is that this is perfectly OK.  What they make off of you, after your rate is paid, is THEIR business. Also, talk about what you do, and your recommended rate.  It would not surprise me to learn that you are currently grossly underpaid. AND, mention that, if the client declines, you're going to be available immediately, and you'd certainly be open to working with them.  (You will see this again.)  In fact, if they have any current leads that you fit, you would certainly be interested in hearing about them.  (They may already have a req from another client, for which you fit, for which the client is willing to pay much more than your current ""employer"".) If it were me, personally, I'd start with Yoh, Belcan, and maybe TAD Technical.  These are three of the oldest and best. I'd also hit up CE Weekly, get a subscription, and find some other shops with offices in your area. Once you have a shop lined up, then ask your ""employer"" if, rather than you setting up a personal corporation, they'd be willing to work with an established Contract Engineering firm,  who does this kind of thing for a living, who does this every day, who has been doing this for decades.  Doing this is simpler for everyone, and, by going through an established firm, they avoid having to teach you how to do business with them.  They also avoid the risk of having you reclassified by IRS as an employee, which exposes them to all kinds of legal and financial liability. If they say ""No"", WALK AWAY FROM THEM.  Immediately.  They've just thrown up a HUGE red flag.  This is where the other discussions with the shop come into play." If you are a temp-to-hire, or you are asked to setup a company then you are not an employee. They expect you to fund everything from your hourly rate. This includes pay, insurance, taxes, social security, sick, vacation, holidays... The rule of thumb for an established company is 1.75 to 2.25 times the salary rate is the rate they need to charge a customer. For example: employee get paid checks for $25/hour x 80 hours x 26 times a year.: 2080 hours or $52,000 per year. Company can only bill customers for 1800 to 1900 hours of labor. They need to bill at 2 times the salary rate or $50 per hour. They will collect $90,000 (1800*50). The numbers have to be run by the particular company based on their actual costs for benefits, overhead and profits.  If they were giving you $25 an hour as a contractor. They expect you to be making $12.50 an hour as an employee. I would not assume they would pay for any benefits. You will be responsible for paying entirely for health insurance and social security and Medicare. This move is most likely not in your best interests. At a minimum, I would charge double your current hourly rate and would charge for all hours worked including time and half for overtime.  3 times is actually probably a better choice if you want to cover holidays (which they will not pay you for), vacation time, etc. I know when I did project bids, we always priced at 2-3 times the salary we paid the employees.
"Generally if you're a sole S-Corp employee - it is hard to explain how the S-Corp earned more money than your work is worth. So it is reasonable that all the S-Corp profits would be pouring into your salary. Especially when the amounts are below the FICA SS limits when separating salary and distributions are a clear sign of FICA tax evasion. So while it is hard to say if you're going to be subject to audit, my bet is that if you are - the IRS will claim that you underpaid yourself. One of the more recent cases dealing with this issue is Watson v Commissioner. In this case, Watson (through his S-Corp which he solely owned) received distributions from a company in the amounts of ~400K. He drew 24K as salary, and the rest as distributions. The IRS forced re-characterizing distributions into salary up to 93K (the then-SS portion of the FICA limit), and the courts affirmed. Worth noting, that Watson didn't do all the work himself, and that was the reason that some of the income was allowed to be considered distribution. That wouldn't hold in a case where the sole shareholder was the only revenue producer, and that is exactly my point. I feel that it is important to add another paragraph about Nolo, newspaper articles, and charlatans on the Internet. YOU CANNOT RELY ON THEM. You cannot defend your position against IRS by saying ""But the article on Nolo said I can not pay SE taxes on my earnings!"", you cannot say ""Some guy called littleadv lost an argument with some other guy called Ben Miller because Ben Miller was saying what everyone wants to hear"", and you can definitely not say ""But I don't want to pay taxes!"". There's law, there are legal precedents. When some guy on the Internet tells you exactly what you want to hear - beware. Many times when it is too good to be true - it is in fact not true. Many these articles are written by people who are interested in clients/business. By the time you get to them - you're already in deep trouble and will pay them to fix it. They don't care that their own ""advice"" got you into that trouble, because it is always written in generic enough terms that they can say ""Oh, but it doesn't apply to your specific situation"". That's the main problem with these free advice - they are worth exactly what you paid for them. When you actually pay your CPA/Attorney - they'll have to take responsibility over their advice. Then suddenly they become cautious. Suddenly they start mentioning precedents and rulings telling you to not do things. Or not, and try and play the audit roulette, but these types are long gone when you get caught." It's difficult to quantify the intangible benefits, so I would recommend that you begin by quantifying the financials and then determine whether the difference between the pay of the two jobs justifies the value of the intangible benefits to you. Some Explainations You are making $55,000 per year, but your employer is also paying for a number of benefits that do not come free as a contractor.  Begin by writing down everything they are providing you that you would like to continue to have.  This may include: You also need to account for the FICA tax that you need to pay completely as a part time employee (normally a company pays half of it for you).  This usually amounts to 7.8% of your income. Quantification Start by researching the cost for providing each item in the list above to yourself.  For health insurance get quotes from providers.  For bonuses average your yearly bonuses for your work history with the company.  Items like stock options you need to make your best guess on. Calculations Now lets call your original salary S.  Add up all of the costs of the list items mentioned above and call them B.  This formula will tell you your real current annual compensation (RAC): Now you want to break your part time job into hours per year, not hours per month, as months have differing numbers of working days.  Assuming no vacations that is 52 weeks per year multiplied by 20 hours, or 1040 hours (780 if working 15 hours per week).  So to earn the same at the new job as the old you would need to earn an hourly wage of: The full equation for 20 hours per week works out to be: Assumptions DO NOT TAKE THIS SECTION AS REPRESENTATIVE OF YOUR SITUATION; ONLY A BALLPARK ESTIMATE You must do the math yourself.  I recommend a little spreadsheet to simplify things and play what-if scenarios.  However, we can ballpark your situation and show how the math works with a few assumptions. When I got quoted for health insurance for myself and my partner it was $700 per month, or $8400 per year.  If we assume the same for you, then add 3% 401k matching that we'll assume you're taking advantage of ($1650), the equation becomes: Other Considerations Keep in mind that there are other considerations that could offset these calculations.  Variable hours are a big risk, as is your status as a 'temporary' employee.  Though on the flip side you don't need to pay taxes out of each check, allowing you to invest that money throughout the year until taxes are due.  Also, if you are considered a private contractor you can write off many expenses that you cannot as a full time employee. FICA taxes are separate from federal and state income taxes. As a sole proprietor you owe all of those.  Additionally, there is a difference with FICA when you are employed vs. self employed.  Typically FICA taxes are actually split between the employer and the employee, so you pay half, they pay half. But when you're self employed, you pay both halves. This is what is commonly referred to as the self employment tax. If you are both employed and self employed as I am, your employer pays their portion of FICA on the income you earn there, and you pay both halves on the income you earn in your business. Edit: As @JoeTaxpayer added in his comment, you can specify an extra amount to be withheld from your pay when you fill out your W-4 form. This is separate from the calculation of how much to withhold based on dependents and such; see line 6 on the linked form. This could allow you to avoid making quarterly estimated payments for your self-employment income. I think this is much easier when your side income is predictable. Personally, I find it easier to come up with a percentage I must keep aside from my side income (for me this is about 35%), and then I immediately set that aside when I get paid. I make my quarterly estimated payments out of that money set aside.  My side income can vary quite a bit though; if I could predict it better I would probably do the extra withholding. Yes, you need to pay taxes for FICA and federal income tax.  I can't say exactly how much you should withhold though. If you have predictable deductions and such, it could be lower than you expect. I'm not a tax professional, and when it comes doing business taxes I go to someone who is. You don't have to do that, but I'm not comfortable offering any detailed advice on how you should proceed there. I mentioned what I do personally as an illustration of how I handle withholding, but I can't say that that's what someone else should do. Forms 1099 and W2 are mutually exclusive. Employers file both, not the employees. 1099 is filed for contractors, W2 is filed for employees. These terms are defined in the tax code, and you may very well be employee, even though your employer pays you as a contractor and issues 1099. You may complain to the IRS if this is the case, and have them explain the difference to the employer (at the employer's expense, through fines and penalties). Employers usually do this to avoid providing benefits (and by the way also avoid paying payroll taxes). If you're working as a contractor, lets check your follow-up questions: where do i pay my taxes on my hourly that means does the IRS have a   payment center for the tax i pay. If you're an independent contractor (1099), you're supposed to pay your own taxes on a quarterly basis using the form 1040-ES. Check this page for more information on your quarterly payments and follow the links. If you're a salaried employee elsewhere (i.e.: receive W2, from a different employer), then instead of doing the quarterly estimates you can adjust your salary withholding at that other place of work to cover for your additional income. To do that you submit an updated form W4 there, check with the payroll department on details. Is this a hobby tax No such thing, hobby income is taxed as ordinary income. The difference is that hobby cannot be at loss, while regular business activity can. If you're a contractor, it is likely that you're not working at loss, so it is irrelevant. what tax do i pay the city? does this require a sole proprietor   license? This really depends on your local laws and the type of work you're doing and where you're doing it. Most likely, if you're working from your employer's office, you don't need any business license from the city (unless you have to be licensed to do the job). If you're working from home, you might need a license, check with the local government. These are very general answers to very general questions. You should seek a proper advice from a licensed tax adviser (EA/CPA licensed in your state) for your specific case. Ask the company if they can make an adjustment for the next paycheck. If they can't then do the following: Increase the number of Federal exemptions by 1. In 2014 a personal exemption reduces your apparent income by $3950.  If you are in the 10 % tax bracket and you are paid every two weeks you will see the amount of taxes withheld drop by ($3950*0.10/26) or ~$15. The 13 Paychecks later change it back. If you are in the 15 % tax bracket and you are paid every two weeks you will see the amount of taxes withheld drop by ($3950*0.15/26) or ~$23. Then 9 Paychecks later change it back If you are in the 25 % tax bracket and you are paid every two weeks you will see the amount of taxes withheld drop by ($3950*0.10/26) or ~$38. Then 5 paychecks later change it back. Remember the money isn't gone, it has just been transferred prematurely to the federal treasury.  You could also wait until you complete your taxes this spring, then see if you needed to make an adjustment to your exemptions. If you normally get a large refund then you should be increasing your exemptions anyway. If you are always writing a check to the IRS then you weren't getting enough withheld. Also make sure that payroll has the correct numbers. Most companies include the number of federal and state exemptions on the paycheck stub, or the pdf of the stub. This is really just a matter of planning.  It's good that you don't want the train to go off the rails but really you just need to budget your fixed expenses.  I do this by having two checking accounts.  One account gets a direct deposit to cover all of my fixed expenses, the other is my regular checking account.   Take your rent and other fixed expenses, if you have any, and total them.  Take that total and divide by four.  That's how much of each check you should be socking away in to the separate account. Additionally, with a 30% pay increase you can probably start a savings account.  You should start to establish an emergency fund so this really never becomes a problem.  Take 10% of your pay and put it in savings, this will still leave you with a healthy pay increase to enjoy but you'll keep some of your money for yourself too. You're on the right track, and yes, that small difference is subject to income taxes. Do you use a payroll service? I do the same thing and use my payroll software to tweak the salary until the paycheck is just a few dollars every month (we run payroll once a month), with the rest going to the 401(k) and payroll taxes. So we're rounding up just a bit just so there's an actual paycheck with a positive number, and a bit does get withheld for fed/state income tax.  Also keep in mind you can make a company match. If your plan is a solo 401(k) with just you and your wife as the sole employees, consider the 25% match for both of you. The match is not subject to payroll taxes because it is a company expense. IRS web page: http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans I think I may have figured this out but if someone could double check my reasoning I'd appreciate it. So if my company makes $75000 and I decide to pay myself a $30000 salary, then the quarterly payment break down would be like this: 1040ES: Would pay income tax on non salary dividend ($45000) 941: Would pay income tax, SS, medicare on salary ($30000) (I'm the only person on payroll) So I think this answers my question in that after switching from filing as LLC to S-corp, I won't have to pay as much on 1040ES because some of it will now be covered on payroll.