When it comes to evaluating the financial landscape of employment options, the choice between being an employee and a contractor can be akin to traversing a labyrinth of complex variables. Whether you’re contemplating a $200,000 compensation package with standard benefits or navigating the contours of self-employment, making an informed decision hinges on a myriad of factors. While we don’t offer employment advice, we can shed light on some illustrative concepts that might guide your thought process.
The Numbers Game
Generally speaking if discussing around a $200,000 comp that has some standard benefits I would guess that the full-time employment to full-time self employment equivalency as far as numbers go is around 45%. This guess means that a $200,000 comp is similar to a $333,333 self employment earnings. The issue with this guess is that it is a factor of around 10 variables and any equity grant is a variable nearly impossible to meaningfully calculate at an early stage.
Unpacking the Variables
Please note we do not advise on employment, but I have some illustrative concepts below to hopefully guide the thinking process a bit. Tax calculations do not account for possible equity and lifestyle changes as far as work hours. So without factoring any one of the variables, including happiness, the exercise may have limited value.
To provide some clarity in this intricate equation of Self-Employed Vs. Employed, let’s break down some key considerations:
- Benefits of Healthcare (Approximately 10%): As an employee, you may enjoy healthcare benefits worth around $2,000 per month, which can be a substantial perk.
- Company-Paid FICA Tax (Approximately 10%): Employees typically benefit from the company shouldering part of the FICA tax burden.
- Paid Time Off (Approximately 10%): With around 5 paid weeks off per year, employees often relish the luxury of a work-life balance.
- Matching Contributions (Approximately 5%): Consider the potential match on your 401K or a similar retirement plan offered by your employer.
- HR Compliance and Overhead (Approximately 5%): Being an employee often means you don’t have to worry about HR compliance, rent, coffee, or other overhead costs that self-employed individuals grapple with.
- Rounding Up or Down: While we’ve rounded up these benefits for illustrative purposes, the actual value may vary depending on the specifics of your situation. Factors like job satisfaction, equity grants, and the number of hours you’re willing to commit can significantly sway the equation.
Around a 40% differences illustrated
Therefore $200,000 comp in such a case = $333,000 self-employed equivalent.
Remember, it’s essential to look at the bigger picture beyond tax calculations. Your primary aim should be to secure fair compensation for the work you provide. Here is a framework generally speaking:
Beyond Tax Calculations
You want to get paid as much as possible in the context of the work required. It is rare if ever that your potential employer is interested in your own calculations. Realistically with the cost of living it is never quite enough and after taxes a base comp in the $250K to $500K is easily justified.
The Equity Factor
If there is equity involved that also becomes a major part of the decision. But with pre-IPO companies it is extremely difficult to put a value on this. This is another part of the negotiation process, but is often somewhat fixed. Occasionally you can try and double (or more) your equity or offer increases / decreases with the tradeoff of increased / decreased comp, but often these differences are difficult to know. It is impossible for me to guess. When the equity does work, it can obviously be life changing.
The Contractor Conundrum
Practically and legally speaking people generally do not remain a contractor forever. It can happen that someone is a contractor for several years, but this often runs up against labor laws. If the company wants a full time person then that is what the offer will be. You might be able to fight for a higher income as a consultant with less overall hours / multi-year responsibility, but that arrangement is generally a bit more temporary in nature. The point here is that most people don’t actually have a clear option to choose between two offers, that is, contractor vs. employee for a long period of time.
Navigating the Legal Landscape
We are not attorneys, nor advise in the area of employment, but I want to bring to your attention the concept of the following: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.
In summary, an employer under the law is not allowed to treat you as an employee and pay you as a contractor. This concept is key to any reasoning here as by definition the “contractor vs. employee” decision is like comparing apples to oranges. Anything may still be compared, but these may not be equivalent arrangements. I also bring this up as I do not know if the CEO would offer you a choice of full time employment at say $200K vs. contractor at $333K. It is possible that the contractor offer would be less hours or on a shorter term.
Hopefully that helps. At the end of the day you are trying to get paid as much as possible given the work expectation. So there are a ton of financial, unknown, and intangible variables.