Problem:

I interviewed for a job in State A that offered a salary of $40,000 plus Medical Benefits. The estimated value of the Medical Benefits is $6000.

The company then offered me a job in State B but I would have to be an independent contractor, which means I have to pay all the taxes and buy my own health insurance. The company wants to pay me enough so that I can buy my own health insurance and so that they can cover 7.65% of Social Security and Medicare payments (as they would for a regular employee).

What does the company need to pay me annually so that I am making as much as I would if I were an employee in State A?

Things to Know:

1. Contractors pay the SELF EMPLOYMENT tax which is 15.3% of gross income broken down as: 12.4% Social Security and 2.9% Medicare.

Employees who receive W2s have half of this paid for them by their employer and the other half is withheld on their behalf – the employer and employee each pay 7.65%.

In my case, the company needs to pay me enough to cover their 7.65%. Obviously, the more they pay me, the higher this will be.

2. The company also needs to pay me enough to cover my health insurance premiums, which, for the sake of simplicity, I am estimating at $500/month ($6,000 year).

3. State A does not have income tax but State B does, so the company should also pay extra to cover this. The state tax rate in B is currently 5.5% of anything over $15,000.

4. I am ignoring the federal tax I would have to pay (or which would be deducted from an employee’s paycheck) because this amount varies depending on filing status etc. I also know that I can itemize and deduct way more than an employee could but I don't want to factor this in for the sake of simplicity.

5. I am, therefore, working on the assumption that an employee in State A, earning $40K would have $3060 withheld for Social Security and Medicare Taxes. The company would also pay $3060 as their portion. The “base salary” before federal with holdings would then be $36,940.

6. My assumption is that, in order to make the same as I would if I were an employee, after I have paid $6,000 for health insurance and 15.3% self-employment tax, I need $36,940. What do I need to be paid (annually) in order for the “base salary” to equal $36,940?

If I have made erroneous assumptions feel free to correct them.

If you need more details please ask.

Paycheckcity.com is a useful resource for withholding information.