Health Insurance & Tax impacting the American Consultant take home pay

This post is about unexpected costs that the American Government has brought to bear that are reducing the income of Consultant BAs in America.

If you work in America or thought of coming to work in America, certain changes over the past few years have really reduced the take home pay of consultants who are not self employed – known as W2 employees because of the end of year tax form received by employees.

For this post, I have assumed that the tax rate for the consultants income will be 30%.

To be self employed (known as 1099 – tax form produced at end of year for employees not directly employed), the client that you work for has to be willing to accept a Corp to Corp relationship and some clients will not accept that. If you are lucky you might be able to get a preferred vendor to hire you on self employed basis. At the end of the day, being able to work either W2 (employee) or 1099 (Self Employed) opens up the number of job opportunities that you can pursue.

How did we get to the point of losing money?

First off, Obamacare (Affordable Care Act) did not reduce the cost of health insurance for the majority. Instead, Obamacare has more than doubled the cost of health insurance since it was introduced – a $500 family policy in 2014 would cost around $1300 today based on what I have seen.

Obamacare also removed the ability to deduct private health insurance costs from your taxable income. Private health insurance was important for consultants as they change employers often. Buying into an employee policy did not always make sense as the relationship with the employer may be only for 3 months (duration of the contract). This private health insurance policy cost could previously be deducted against your taxes whether you were W2 or 1099. What Obamacare effectively did, was to get rid of that deduction option for W2 employees. This is like a 30% surcharge on health insurance because you now pay for the private health insurance policy with after tax income. 1099 employees can still deduct the cost of the health insurance against their income since the insurance can be deducted as a business expense. However, even if you are 1099, that does not overcome the fact that health insurance costs have more than doubled.

The second reason W2 consultants are losing more money is because of the tax law change of 2018. Previously if you had travel expenses that exceeded 2% of your W2 income, you could deduct that amount from your taxable income. This deduction was removed starting tax year 2018. This means that if you do any amount of heavy travel for work that your company does not pay you for, those travel expenses are now 30% more expensive. I spoke with a recruitment agency the other day who said that more and more consultants are declining W2 job opportunities that would require them to work out of their home town because of the tax law change.

If you are W2 and you need to travel for work overnight or longer, you could ask for “Per Diem”. This is a IRS approved amount that is not taxed and the amount is based on the location that you are working in. One way to negotiate this is to get an agreed rate and then ask for some of the income to be converted to Per Diem money. However there are flaws with this approach:

  • Per Diem expires after a period of time. Basically after your have been in a location for 12 months or you expect to be at a location longer than 12 months, the IRS no longer considers you eligible for tax free Per Diem.
  • You have to have a tax home more than 50 miles away from where you work.
  • The client or employer that you are going to work with may not want the hassle of doing Per Diem reporting.

In summary, the American system has started to close the door on W2 employees that are Business Analyst Consultants by increasing the cost to do business. Consultants will need to:

  • Pursue more Corp to Corp jobs (basically be self employed).
  • Work at reduced rates for companies that will cover their expenses.
  • Work only on local jobs that do not have expenses associated with them.