There is one advantage of being paid partly as a W-2 employee and having the remainder of your income paid as an independent contractor.

Each year, you only pay social security taxes up to a certain limit. For 2011, the max in $106,800, increasing to $110,100 in 2012. When you work as an employee, your employer withholds Social Security taxes at a rate of 6.2% (currently reduced to 4.2%), and then your employer matches the taxes withheld (at a rate of 6.2%). When you're self-employed, you pay this tax as part of your federal income tax return. It's called the "self-employment tax".

The self-employment tax is based on a Social Security tax rate of 12.4% (currently 10.4%) and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee's portion and the employer's portion of both taxes.

If you earn income as an employee and as an independent contractor, and your combined income exceeds $106,800 in 2011 or $110,100 in 2012, you stop paying the 12.4% (currently 10.4%) portion of the self-employment taxes. So you need to reduce the $106,800 (110,100 in 2012) max by the amount of Social Security wages you receive as a W-2 employee.

The moral of this story is that any wages paid to you as a W-2 employee will save you on the self-employment tax at a rate of 6.2% of the wages earned, assuming your total income will exceed the annual Social Security Max.

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