Unique Benefits of Working as Consultant

How W-2 (Agency Employed) Professionals are Coming out Ahead

The most common allure to working as a consultant is probably the independence that accompanies it. This freedom is a quality of all types of consultant arrangements: freelance, limited partnerships, and agency employed. The latter group, as you'll read, enjoy some special benefits. Read on and learn more about two unique advantages to working specifically as a W-2 consultant.

By Chris Alfe, Thingamajob Staff Writer

To an independent consultant making $50,000 a year, this would mean almost an additional $4,000 more in taxes compared to a similar consultant working through an agency.

Agency-Employed Consultants Pay Lower Taxes

Lower taxes! I knew that would get your attention. There are essentially two types of federal taxes to which American workers are subject- Federal Income Tax and F.I.C.A. Tax. Federal Income Tax, regardless of whether it is being withheld by an employer or not, is due annually and the same rate bracket system applies to everyone. In other words, independent consultants who work for themselves and file an I.R.S. Form-1099 are subject to the same tax rates as their W-2 counterparts, but the independent consultants are also responsible for saving enough income throughout the year to be able to cover their annual Federal Income Tax bills. (State and local income taxes also apply in many areas.) All other things being equal, both independent consultants and agency consultants are responsible for about the same amount of Federal Income Tax if they have equal incomes; they are just paid differently.

The same is not true for the other main type of tax, F.I.C.A. Tax. F.I.C.A Tax, used to fund Social Security and Medicare, is paid each pay period at the same set rate for nearly all workers, 15.3% However, employers are generally responsible for contributing half of this amount on behalf of each employee.

This means that most agency employed workers only need to pay 7.65% of their taxable income (income over $94,200 is excluded from the Social Security portion) towards F.I.C.A, while independent consultants have to pay twice that amount in "Self Employment Taxes." To an independent consultant making $50,000 a year, this would mean almost an additional $4,000 more in taxes compared to a similar consultant working through an agency.

Many Agency Employed Consultants Are Offered "Non-Wage Benefits"

Non-wage benefits, such as 401(k) plans, health & welfare plans and holiday pay, can be extremely valuably both financially and otherwise. While independent consultants are rarely presented with any fringe benefits, some agency consultants may be offered total compensation packages rivaling regular, full-time employees.

To a consultant earning $50,000 a year, the benefit of having two weeks vacation has a value of nearly $2,000.  Company sponsored retirement savings plans, even those without company matches, can save consultants  hundreds or thousands of dollars per year in federal taxes if fully utilized. Health & Welfare benefits can be valued at 15% to 20% of your annual salary or more.

Discuss

Any experience in the consultant world?

Ever wonder how much non-wage benefits are really worth? Here are some thoughts:

• Five days of holiday or vacation pay to an agency consultant making $50,000 annually are worth about $1000 before taxes.
• 401(k) plans offer a valuable tax shelter that will save a consultant who makes $50,000 annually, and contributes 5% to his or her 401(k) plan, $500 a year or more in reduced Federal Income Tax liability. This is in addition to any investment gains.
• Profit sharing plans or matching employer contributions made to a 401(k) account or other account can be worth hundreds or thousands of dollars annually.
• Medical and dental coverage, such as H.M.O. or P.O.S. plans, is much more affordable when offered through an employer. In addition, companies usually help defray the cost of these benefits, reducing the prices for employees even further. Comprehensive medical and dental coverage for a single person can cost $2,000 or more in some regions, so employer contributions and discounts are quite valuable.
• Other fringe benefits, such as group life insurance, accidental death / dismemberment (AD&D) coverage and dependent life insurance, where available, are offered at low prices typically unobtainable to individual contractors.

NOTE:

The information disclosed in this article may not be available in your area or through your particular staffing company. To learn how consulting may benefit your professional career, find a recruiter within the Thingamajob network. We have several hiring companies with offices nationwide and abroad that can assist you.

Chris Alfe is a staff writer for thingamajob.com.  He has ten years of experience in staffing and human resources and currently resides in Baltimore, Maryland.

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