Question

Mike wanted to work for a CPA firm but he also wanted to work on his father’s farm in Montana. Because the CPA firm wanted Mike to be happy, it offered to let him work for the firm as an independent contractor during the fall and winter and return to Montana to work for his father during the spring and summer. He was very excited to hear that the firm was also going to give him a 5 percent higher “salary” for the six months he would be working for the firm over what he would have made over the same six-month period if he worked full-time as an employee (i.e., an increase from $30,000 to $31,500). Should Mike be excited about his 5 percent raise? Why or why not? What counteroffer could Mike reasonably suggest?

Answer 1

Answer:

Employment and self employment taxes:

In the present case M need to work for a CPA firm just as in his dad's firm .But the CPA firm offered him to fill in as a self employed entity and vowed or promised to pay him 5 % more than what he would have earned as a worker or employee.

Right now ,M ought not feel that energized as it appears to be ( 5% more significant compensation ) for the accompanying reasons :

1)

This is on the grounds that while M is getting 5 % more significant salary as a self employed entity or independent contractor ,he is obligated to pay FICA tax comprising of social security tax expense and medicare tax ,both as a business and as an employee too.

2)

Rather than 5 % more significant compensation as a independent contractor , he is liable to pay 6.5%

[(15.3% * 0.9235) - 0.0765] more than what he would have paid as a employee ,expecting that M's payment is under social security cap .Hence , he will be paying more than what he will get as additional payment , despite the fact that M is likewise permitted to deduct the employer share of his self -employment tax as a for AGI deductions.

3)

M would have happier as a worker or employee ,considering the marginal tax rate for federal tax purposes and the social security taxes.

4)

In addition as a independent contractor M would be denied of the advantages like medical coverage or health insurance,life insurance ,retirement savings contribution and different advantages typically accessible to employees

5)

As a independent contractor ,M might have the option to deduct premiums for medical coverage and retirement savings contribution  with respect to AGI deductions .

6)

Furthermore M feel independent as an contractor and can do whatever and at whatever point he likes,in contrast to an employee ,who is secured by the duty schedule and don't have freedom during duty hours.

7)

In general M should out from reasonable counter offer by considering ,the additional FICA taxes that he needs to bear separated from being denied of other worker like advantages and ought not be over excited about the offer from the CPA firm