Bottom Line

iamindependent-employee vs. Self-employed Person

We asked the accounting firm of Infeld Barr CPAs to create a tax return for one of our members, an iamindependent-employee (W-2) and then to create a tax return if this consultant filed as a self employed person (1099).

The consultant had the following:

Invoiced the client $127,368
Per Diem Lodging $21,326
Mileage auto $3,123
Medical Insurance $3,023
Medical reimbursement $548
Per diem-Meals $10,766
Phone $1,593
Entertainment $6,959
Computer $835
Travel $2,350

Internet $451
Tuition reimbursement $2,100
Office supplies $2,056
Parking & tolls $1,456
Retirement Plan $2,323
Publications $124
Local travel $566
Bank charges $123
Postage $21
Misc $25

In addition:

1) The self-employed person has an additional $400 in accountant fees and $7,000 in various insurances.

2) The iamindependent-member will incur two additional expenses; the IAI fee of $5,094.72 and the exclusion fee of for meals and entertainment of $3,545.06.

While the expenses for the iamindependent-employee (IAI member) are greater, the retained earning of the IAI member is 17% higher.

The worksheet starts with the $127,368 invoiced for both the member and the self employed person.

iamindependent-employee (Member)

The three non-reimbursable expenses are IAI fee of $5,095, employer taxes of $7,831 and the entertainment exclusion of $3,545 for a total of $16,471. This leaves $110,897 in the IAI employee’s account. IAI reimbursed the member for the IRS approved tax-deductible employee’s expenses of $57,443 reducing the amount of dollars available for payroll to $53,454. After a contribution to the member’s 401K retirement plan of $5,345 this created a gross taxable income of $48,109. The member pays federal taxes of $10,357 and received a net after tax paycheck of $43,097. The member’s total after tax retention is $49,607 (retirement plan $5,345, tax savings on medical reimbursement, local travel, and exclusion times 25% tax bracket or $1165, and net pay of $43,097).

Self-Employed Person

The self-employed person invoiced the same amount of $127,368. He was reimbursed $64,843 and contributed $5,345 to his retirement plan. This leaves a balance of $57,180. The payroll tax amounted to $20,146 creating net pay after taxes of $37,034. The net amount retained is $42,379 (retirement plan of $5,345 + net pay of $37,034).

Conclusion

The iamindependent-employee has retained $49,607 versus the self-employed person of $42,379. The net increase in retention for the iamindependent employee is $7,228 or an increase of 17%.

See a completed 1040 with all the schedules for a consultant who is self-employed (pdf)
See a completed 1040 with all the schedules for a consultant who works for IAI (pdf)

Once you review this information, we have no doubt that you will be convinced.

Summary Table

	iamindependent-employee		Self-Employed

Amount Invoiced		$127,368.00		$127,368.00

Non Reimbursed Fees	$5,095.00 IAI 4% fee.
Employer Taxes & Fees	$7,831.00
Exclusions	$3,545.00 Perdiem meals & entertainment expense is only deductable at 50% tax deductable by the IRS. IAI tax rate is 40%. We reimburse 100% and charge the account 120%, (which is 50% taxable times 40% tax rate.)	$16,471.00 Total amount to be subtracted from amount invoiced.

Amount Available		$110,897.00 Total invoiced less fees and exclusions.
Reimbursed Expenses		$57,443.00 Untaxed expenses to be subtracted from available amount.		$64,843.00
W-2 Wages		$53.454.00 Amount actually available as taxable income.
FICA	$3,314.00
Medicare	$775.00
Federal Income Tax	$6,268.00
Total Taxes		$10,357.00 Total amount employee payroll taxes taken from the W-2 wages.

Amount Available		n/a		$57,180.00
Self Employed Taxes		n/a		$20,146.00 See Independent Consultant tax return pg 2 line 63.
Net Pay		$43,097.00 W-2 wages less total taxes.		$37,034.00
Retirement Plan		$5,345.00 10% of W-2 Wages		$5,345.00

Increase in Net Worth
Net Pay		$43,097.00		$37,034.00
Retirement Plan		$5,345.00		$5,345.00

Tax Saving on NonTaxable Deduction
Exclusion	$886.25
Medical Reimbursement	$137.00
Local Travel	$142.50
		$1,164.75 The extra 25% of the total amount of non-deductable expenses that were reimbursed by IAI.

Amount Retained		$49,607.75		$42,379.00
IAI Savings		$7,227.75
% Increase in Net Worth		17%

Call an IAI representative for more information: 201-567-2434 or email us at info@iamindependent.com