Question

5a: Maribelle, a single taxpayer, has a new job opportunity at Amazon, she has the opportunity to consider being an independent contractor OR being a full-time employee of Amazon. Maribelle understands that if she was self-employed as contractor, Amazon would be her client and she would have additional taxes to pay but would be able to deduct business expenses.

5b: Maribelle salary as independent contractor would be higher. Assume Maribelle’s salary $165,000 as contractor but receive no medical care from Amazon. Maribelle’s salary as full-time employee would be $105,000 and receive healthcare & retirement. Please advise Maribelle in a short Client Letter.

5c: What business expenses might Maribelle be able to deduct? What other taxes might Maribelle have to pay as a Contractor? What are the pros and cons of being a contractor vs. a full-time employee?

Answer 1

Client letter:

November 14, 2019

To: Maribelle

Sub: Independent contractor or full time employee

Dear Maribelle,

After considering your situation and your earnings figure my advice to you will be to select being an independent contractor for Amazon. First of all in case of being an independent contractor your annual earnings are higher when compared to your annual earnings as an employee of Amazon. You will be able to deduct your business related expenses from your earnings as a contractor and this will mean that the entire amount of $165,000 will not be taxable and all business related expenses can be deducted. This will lead to substantial tax savings for you. You can always buy your own medical care from the market and the tax benefits from deduction of business expenses will more than offset the cost of the medical care policy.

Hope the above is clear. Please feel free to contact me in case of any clarifications.

Regards,

Mr. XYZ

(Tax advisor)

5c: Business expenses that Maribelle will be able to deduct are expenses like travel and commuting, communication, telephone and internet related expenses, miscellaneous office expenses, SG&A expenses and other such expenses that are necessary and enables her to carry out her activities as a contractor of Amazon. The other taxes that she will have to pay as a contractor is 100% of FICA, and income taxes that are not withheld.

The pros of being a contractor vs. a full-time employee are that a contractor has more freedom and flexibility with regards to the work being done by him/her. Secondly earnings of contractors are higher when compared to earnings of employees as usually contractors are paid above the market rate. Lastly contractors work on different assignments and companies and hence have the opportunity to expand their skill sets and horizon. In terms of cons a contractor does not have the same level of job security as an employee enjoys. Secondly contractors do not have a sense of company culture and lastly contractors may have to pay more out of pocket insurance contributions in some cases.