Don't Hire That Developer

What everyone seems to forget is you also have to pay a 15% self-employment tax at the end of the year out of your pocket because you do not have a W-2. The tax liability is higher as well.

So not only do you have to get independent insurance (which is very expensive), you have no 401k or match and probably have to manage your own Roth, you have increased tax liability and pretty much no control to push back.

Now, I'm not saying you should be an employee vs. contractor - there's benefits and downsides to both. But saying that a contractor makes even 90k when an employee makes 45k isn't really saying much.

In the US, you're already paying half that 15% anyway. You pay the additional half being self-employed, but it's also a deductible expense.

The biggest adjustment people need to make is keeping track of the financial aspect in general. It's not that hard, but you need to keep an eye on it. Make estimated tax payments quarterly, don't spend more than you make, keep extra money in reserve, etc.

Also, as I wrote elsewhere, I'm paying $300/month for health insurance for my wife and I. That's close to what was being deducted for my group plan when I was employed (it's a bit more, but not that much more). Yes, we're fortunate as we're both in decent health, but we've also chosen a moderately high deductible plan, which keeps the premiums lower (though they still keep going up insanely every year).

I've not done it yet, but as a self-employed person, you can set up a SEP-IRA (I think that's it) and some people manage to sock away much more in a SEP than is allowed in traditional Roths or 401Ks. If you've got it and can save it, that's decent deal.

I will say $90k as self-employed vs $45k employed is a pretty big difference, even factoring in the tax/benefits diffs. But I don't normally see that much of a difference in skill levels and income. SR devs I know contracting may be making $120-$150k, but as an employee might only be around $90-$100k. That's a difference, but not a 100% diff.

In the economic hard times, many states (WA, CA, MA) are going after companies that do this. Yes, auditing and fines.

You might think they won't find you. Well, here's how they will: contractor Joe has been working for you for 3 years. You decide you don't want him anymore (for a variety of reasons). He files for unemployment, even though he's not supposed to. He figures, hey, I'm an employee so I deserve it. In CA, the EDD will use this red flag to audit, likely find that Joe was an employee, fine the company and give Joe his unemployment insurance.

I'm not passing judgement here, just stating the facts.

1. The "Self Employment Tax" (in other words, FICA and Medicare) is closer to 7.5% extra for the self-employed. When you're an employee you pay 7.5% of this, and your employer matches that. When you're self employed you pay the entire thing.

2. The FICA and medicare tax can be avoided if you're contracting through a third party agency (and being paid W2 via that agency). This has its own set of tradeoffs and rewards, but is another option worth considering.

3. Remember that the 401k match has to vest, meaning that 4% match is closer to 1.6% if you hold the job for only two years. (on the flip side, that 1.6% is pre-tax)

The matching can also be a temporary benefit if your smaller company gets bought out by a larger one.

4. Paying your own health insurance is a burden, but it's a burden with a fixed monthly cost. It's worth investigating self-insurance options and doing a straight up dollars to dollars comparison.

Consulting and contracting aren't for everyone, but if there's parts of full-time employment that frustrate you it's definitely a route worth considering.