I'm a consultant and have been for quite some time now. In April of 2007 I finally incorporated and I have been successfully paying myself a paycheck ever since. There are many benefits to me to be in business including business write offs, the ability to put away more money in my IRA, etc. I have my own benefits and do not wish to give them up.
I have also worked on a W2 basis in the past. However I got to thinking that I have never ever been placed a second time by the same recruiting firm. In other words, I may be working through a consulting firm on a W2 basis. And at times I've been extended on the same contract. But when that assignment ends the consulting firm does not place me somewhere else. So whatever consulting firm I go to next I'll have to renew my benefits there. I probably will not be at the first consulting firm long enough to get vested in their 401(k) plan so I'll have to roll it over, etc. I also do not benefit from the benefits offered because I don't have the wife and kids (my child is an adult now) to utilize the benefits offered. It used to be that the consulting firm would pay you a reduced salary when you were between contracts, and that was their incentive to get you placed at the next assignment quickly, but they don't do that anymore. Instead you're out the door on your own to find your next assignment.
So what's the point of being somebody else's employee? Just so they can process payroll for me and take out taxes? You know Wells Fargo does that for me and it costs me less than $0.15/hour to do this. Yet W2 employees are offered rates that are between $20-$30/hr less than true independent consultant working on a 1099 or C2C basis. You can calculate what benefits cost and it's not that much in terms of $/hour - like $10/hr tops. And bare in mind that most of them offer pretty minimal benefits and the new rage is "W2 without benefits"! If you come across one of those ask them how many consultants they have on W2. If it's > 50 then the must offer benefits!
Also, when you employ a person as a business you must pay the other side of the payroll taxes. This is currently about 7.5% or on a $100K income that's $7,500 AKA $3.75/hr.
The usual arrangement for my contracts is that I am working for the client through a consulting firm. I bill the consulting firm and they bill the client. The consulting firm often has consultants that are on a W2 basis (IOW they are employed by the consulting firm), maybe some consultants on a 1099 basis (meaning they have their own business like a sole proprietorship) and perhaps some working on a C2C basis (same as 1099 except the consultant has formed a corporation).
I've found many recruiters state that the client insists that the consultant is paid on a W2 basis. However this makes no sense. I've often asked but have yet to hear a valid business reason for the client to insist that the consultant is paid on a W2 basis. In fact it's really none of their business how the consulting firm wishes to engage with the consultant be it on a W2, 1099 or C2C basis. As we can see above it's better and cheaper for the consulting firm to just pay the 1099 or C2C consultant directly. In such situations the consultant assumes all of the liabilities for paying his own taxes, benefits and insurance requirements. The consulting firm does not have to offer, pay for nor administer any benefits nor do they need to pay the 7.5% of the payroll taxes. Why is it only in the IT consulting field that this is an issue?
When I'm faced with a "the client wants W2 only" situation I ask them the following question: Have you ever hired a plumber/electrician/carpet cleaner do to work at your house? If so did you bother to call the phone number on his truck to insure that the person who showed up was being paid on a W2 basis? None of them have and if they are at all intelligent they get where I'm coming from. It's of no concern to them and likewise should be of no concern to the client in my situation.
So then why do client's insist on W2 only? I can't be sure (because recruiters never even think about this let alone have put forth a rational answer to the question "What is the business reason why the client insists on W2?") but I have some theories:
However one should note from that same Wikipedia page:
I have also worked on a W2 basis in the past. However I got to thinking that I have never ever been placed a second time by the same recruiting firm. In other words, I may be working through a consulting firm on a W2 basis. And at times I've been extended on the same contract. But when that assignment ends the consulting firm does not place me somewhere else. So whatever consulting firm I go to next I'll have to renew my benefits there. I probably will not be at the first consulting firm long enough to get vested in their 401(k) plan so I'll have to roll it over, etc. I also do not benefit from the benefits offered because I don't have the wife and kids (my child is an adult now) to utilize the benefits offered. It used to be that the consulting firm would pay you a reduced salary when you were between contracts, and that was their incentive to get you placed at the next assignment quickly, but they don't do that anymore. Instead you're out the door on your own to find your next assignment.
So what's the point of being somebody else's employee? Just so they can process payroll for me and take out taxes? You know Wells Fargo does that for me and it costs me less than $0.15/hour to do this. Yet W2 employees are offered rates that are between $20-$30/hr less than true independent consultant working on a 1099 or C2C basis. You can calculate what benefits cost and it's not that much in terms of $/hour - like $10/hr tops. And bare in mind that most of them offer pretty minimal benefits and the new rage is "W2 without benefits"! If you come across one of those ask them how many consultants they have on W2. If it's > 50 then the must offer benefits!
Also, when you employ a person as a business you must pay the other side of the payroll taxes. This is currently about 7.5% or on a $100K income that's $7,500 AKA $3.75/hr.
The usual arrangement for my contracts is that I am working for the client through a consulting firm. I bill the consulting firm and they bill the client. The consulting firm often has consultants that are on a W2 basis (IOW they are employed by the consulting firm), maybe some consultants on a 1099 basis (meaning they have their own business like a sole proprietorship) and perhaps some working on a C2C basis (same as 1099 except the consultant has formed a corporation).
I've found many recruiters state that the client insists that the consultant is paid on a W2 basis. However this makes no sense. I've often asked but have yet to hear a valid business reason for the client to insist that the consultant is paid on a W2 basis. In fact it's really none of their business how the consulting firm wishes to engage with the consultant be it on a W2, 1099 or C2C basis. As we can see above it's better and cheaper for the consulting firm to just pay the 1099 or C2C consultant directly. In such situations the consultant assumes all of the liabilities for paying his own taxes, benefits and insurance requirements. The consulting firm does not have to offer, pay for nor administer any benefits nor do they need to pay the 7.5% of the payroll taxes. Why is it only in the IT consulting field that this is an issue?
When I'm faced with a "the client wants W2 only" situation I ask them the following question: Have you ever hired a plumber/electrician/carpet cleaner do to work at your house? If so did you bother to call the phone number on his truck to insure that the person who showed up was being paid on a W2 basis? None of them have and if they are at all intelligent they get where I'm coming from. It's of no concern to them and likewise should be of no concern to the client in my situation.
So then why do client's insist on W2 only? I can't be sure (because recruiters never even think about this let alone have put forth a rational answer to the question "What is the business reason why the client insists on W2?") but I have some theories:
- W2 contractors are more like the sheeple of employees out there. They aren't true consultants trying to run a successful business and perhaps build it up. Most likely they are or wish to be employees because they assume that that's more secure and they don't want to be bothered with running their own business. The best they could find was a consulting job and being on W2 is comfortable and familiar to them. Clients like such tame, go along with the crowd, workers.
- Clients often want so called "contract to hire" where at the end of assignment an offer of permanent employment will be made. True consultants running their own businesses get paid a lot better than permanent employees or W2 employees. The "sticker shock" that results when clients attempt to convert their consultants to perms is often too much for the consultant to lose. Paying W2 employees less to start with lessons this sticker shock (and we already know the W2 consultant is more likely to want to be perm as they are already an employee of somebody else - they're not independent).
- Many consulting firms offer consultants who need H1B visas. I believe in such situations the H1B visa holder needs to be employed on a permanent basis. Why it should be the concern of the client how the consulting firm employs their consultants is still beyond me however as it would seem to me that the consulting firm should be free to engage non H1B visa consultants on a C2C basis.
- I think some clients believe that they lesson the likelihood that the consultant will be considered their employee when they are obviously an employee of another firm. There was a big brew ha ha back in the day with some Microsoft consultants being found to be Microsoft's employees and not consultants. Microsoft was forced to pay them a bunch of money because of this (see Vizcaino v. Microsoft).
However one should note from that same Wikipedia page:
The IRS definition of a common law employee rests on whom actually controls the work done by the leased employee. IRS Publication 15A explains "Under Common Law Rules anyone who performs services for you is generally your employee if you have the right to control what will be done and how it will be done..."As such many if not most (or even all) IT consultants that I know are told not only what will be done but how it will be done. Of course, the client has the right to define the work to be done, but how to do it? Think of this as you would if you hired a lawyer. You would tell him what you would want to see happen, but you would not tell him how to do his job. Additionally truly independent workers often bring their own tools. Now tell me the last time you saw an independent IT consultant come on the job site and say "Here's my laptop - hook it up to your intranet. Oh and I'll be re-writing that code in a language of my own choosing"....
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