Two Types of USA Contractors
There are two main types of USA Contractors. There are the 1099 and the W2 contractors. The 1099 is pretty close to the current type of contractor in the UK prior to IR35. The W2 equates more to those that fall under IR35 in the UK. However, there are major differences.
It is worth looking at that, as this may be the way that IR35 will evolve in this country.
Unlike in the UK, where a contractor must try and work out whether he or she is IR35 or not, it is usually the Client company, or the IT Agency, who will decide which category of contractor that they want and advertise accordingly.
It is entirely up to the IT contractor what type of contractor he or she wants to be. Moreover, he or she won‘t have the worry of the HMRC lying in wait for them if they categorize themselves wrongly.
Under W2, the Agency or Client company employs the USA contractors for the duration of the contract.
Some companies, usually the larger ones, don‘t want to deal directly with contractors. However, they want the level of security that they feel they can get from W2.
Very often the large national IT agencies don‘t want to deal with 1099 contractors. That’s because their margins are higher for W2 contractors (although they have more administration to perform).
The smaller agencies are happy to deal with 1099s, and the large local agencies tend to deal with either.
Unlike with IR35, the IT contractors get all the benefits and legal protection of a permanent employee.
– 401K pension contributions,
– their Social Security and Medicaid contributions,
– sick pay, and
– holidays to boot.
It attracts those contractors who would like more security. It also those permanent employees who would like the greater wages of to a contractor, without taking the risks of being an all-out 1099 contractor.
Incidentally, UK IT contractors working in the US on a temporary work visa get all their taxes refunded for a period of up to 6 months.
USA Contractors Claiming Expenses
There is also one great advantage which doesn‘t apply to IR35 contractors. That is if they are working more than 40-50 miles away from their ‘offices‘, they can claim a certain amount of their hourly rate for expenses.
It varies from city to city. However, in the major cities, they can get $15-16 per hour tax free. They can get $10-11 per hour tax free in the smaller cities and towns.
This is a definite advantage on the 5% that IR35 contractors can claim. Indeed the Government in the UK took away the chance to claim Travel and Subsistence altogether for Umbrella Company contractors.
The rates for W2 contractors are about 20-25% less than the rates given to 1099 contractors. They also have more tax to pay, as well, although you should factor in the benefits.
However, clients are more likely to chop them from a project than the 1099 contractors, that the Agencies are making more money from.
Taxed as Employees
I told my US contact that our IR35 contractors were taxed as employees without getting any of the benefits or protection of employees. He replied, ‘That‘s taking the mickey (word changed) a bit, to be honest with you. How can they get away with that’?
He also revealed that it was pressure from the major consultancies like Andersens and KPMG which got them to change the law in the first place. It was sneaked through Congress, originally, at dead of night.
It was amended afterwards, after pressure from contractors‘ groups, to make it more equitable.
A 1099 contractor, with a reasonable accountant, can expect to pay around 15-18% of his or her income in tax.
The main tax rate is 25%, with a lower band at 15%, and an upper band at 40% for income of around $100,000 or more.
Fully Fledged Contractor
As far as 1099 is concerned, it is similar to a fully fledged contractor in the UK. That’s except that there is not the worry about whether you fall under IR35 or not. That’s because the contractor makes the choice himself, which way he wants to work.
This seems to me to be a more equitable system. The Government doesn’t impose it. It is the choice of clients, agencies and contractors as to which way they want to work, and which type of contractor that they wish to employ.
That way everybody is happy, unlike in the UK. USA Contractors know what their status is, and they don‘t have the worry of an investigation by the Inland Revenue.
The Government aren‘t taking the ‘mickey‘ as my contact suggested.
For further advice on Contracting click on Contracting.
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