Compensation Dilemma modifying from salary to impartial contractor – Score: 7

6 thoughts on “Compensation Dilemma modifying from salary to impartial contractor – Score: 7”

  1. In this environment, maybe stay salaried just for the salary history and unemployment insurance benefits. If you get furloughed or laid off, you would get nothing as a 1099 employee unless the government changes policies temporarily like they did via the CARES Act. After the pandemic and the full effect on office space demand is known, then you could consider it if you have your emergency fund in good shape.

  2. Would you be expected to bring in your own business or keep working on deals the senior broker brings in? What would the splits be with him? All things I would consider

  3. (tl;dr at end)

    I’ve been both a salaried agent (SA) as well as an independent contractor (IC) agent, and now I’m an independent broker in Central Texas. Here’s my 2 cents: It depends. Lousy answer, but bear with me!

    Salary:

    1. There are a few benefits to being salaried. As others have mentioned, in the currently unknown economic situation, should you get laid off/furloughed as a salaried employee, you could qualify for state unemployment benefits. As an IC, you are out in the cold unless there are federal benefits, or your state offers some pandemic-related benefits.
    2. Employer-offered benefits can’t be ignored. Depending on your state and the benefits offered, you have to account for the value on PTO and Paid Sick Leave. As an IC, these are both gone. If you are sick as an IC, or need to take time off for family/personal reasons, you are on your own. The other benefit that holds significant value is health insurance (as others have mentioned). If you get your health insurance through your employer with some cost-sharing, take that into account.
    3. With a salary, if you have any stretch of time with no major deals coming through, at least you know you have a predictable amount of income coming to you regularly to help cover mortgage, bills, etc. As an IC, you may have a deal come through with a nice big commission but then go without any deals for a while, and that can wreak havoc on the finances.

    Independent Contractor

    1. Depending on your market and the size of industrial deals, it might only take a few deals for you to earn more in commission than you would on the salary + 5%. On the salary plan, you could be walking away from significant income.
    2. You have the flexibility and freedom to operate on your own schedule, pursue deals and clients you want to work, and have your hard work rewarded in the form more money. If you close a few big deals, you may be able to enjoy a slight break before jumping right back into it (or keep plowing hard and banking up!).
    3. As an IC, it is easier to log and track your deals for the experience requirement to get your Broker license in your state. As an employee, it can be tougher to validate these deals, depending on how your sponsoring broker sees your role.

    From a purely financial side, here are some quick numbers. For this, I’m comparing $90k + 5% as an employee against an IC on a 60/40 split with the brokerage, assuming a 3% gross commission on all deals, and employer pays 1/2 of $650/m health insurance. At $5.7M in total deal value, it would be a wash either way. If your broker offers better than 60/40 (or a sliding split based on total annual commission brought in), then the total deal value required to breakeven would drop.

    tl;dr: Make a list of pros/cons for each, and balance the trade-offs based on income stability, job security/benefits, and your personal future growth plans.

  4. Weigh out the risk vs the reward, you’re potentially leaving a lot of money on the table by staying as an employee in both income and taxes however as other people commented staying an employee is a safer option so can receive benefits like health and unemployment insurance. At the end of the day, you need to ask yourself what your risk tolerance is and how hungry you are to achieve your financial goals.

  5. If you take the IC route, definitely setup an LLC with an S Corp tax election. This is advantageous if you’re annual income is $90k+.

    The S Corp election will save you at least ~$7k/year in taxes assuming income of ~$100k. The downside is, you’ll need an accountant to manage your books which is ~$1500/yr. Still a solid net tax savings! Tax savings include a reduction in self-employment taxes owed + a 20% tax deduction on flow through dividend income.

    A bit more color — a Sole proprietor LLC is a pass through entity, which means all your income flows straight to your personal tax return.

    Under the S Corp election, you’re an employee of the LLC; you pay yourself a “reasonable” salary and the rest of the income passes through to your personal income statement as dividends rather than income, thus it is taxed differently (which includes a 20% reduction in taxable dividend income).

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