Deception of Free Benefits and myths of 80-20 Billing Rate

Kartik is working in USA on H1B visa, and he happily announced a good news to his friend Nishit that his H1B visa employer takes really good care of him. Nishit asked “Tell me how ?“. Kartik enthusiastically replied back my employer pays 12 paid vacation days a year , 80% of the health insurance premium and does not charge me for paying employer side of the business tax. Majority of the H1B employee thinks that they are getting these benefits for FREE. But it’s a myth.

Deception of Free Benefits and myths of  80-20 Billing Rate H1B visa

What are those myths that employee believes that they are getting it for FREE ?

  • PAID vacation days are FREE.
  • The 80% of the health insurance premium paid by employer is FREE.
  • And employer is paying his side of the tax ( the business tax) is FREE !
  • Employer is paying for any certification cost, and that is also FREE !

Stop dreaming ! Even not for profit organization in USA will not return such favors ! Nothing is FREE. In a nutshell, you earned it for your employer and then using your own hard earned dollar the employer is paying or able to afford and offer those vacation days and health insurance premium. It applies to any employer.

Does it make a practical sense that employer provides you FREE services from own wallet ? Of course not, employee has to earn enough for employer to help pay those bills ( also known as benefits !) and have some profit margin left for employer. Such profit helps employer to keep the lights on in their office.

However, majority of employees working in USA ( H1B visa) thinks that his/her H1B visa employer is stealing lot of his/her hard earned dollars and hence s/he need to find a way to keep employer’s profit to bare minimum. One option that is very popular among H1B community is 80%-20% meaning that for each hour the H1B employee works at the client side as a contractor. The 80% of the money is kept by H1B employee as a gross income and 20% is kept by employer as a gross profit.

On a surface value such proposal of 80%-20% sounds very attractive. But as you dig deeper , you may find many pitfalls and risks.

Here is the sample scenario to help you understand it.

Scenario : Employer ( Dhokha Concepts) is getting paid $60 per hour for Kartik’s work at the client site Dnfosys. Kartik demands to Dhokha Concepts ( his H1B employer that he would like to go for 80-20 meaning that 80% of the $60 will be kept by employee and rest 20% will be kept by Dhokha Concepts. And Dhokha Concepts will run the payroll for the employee. And, H1B visa employer agrees to these new terms and conditions.

Kartik is now filled with joy when he runs the following number:

Kartik ( 80% ) – H1B employee
Dhokha Concepts (20%) – H1B Employer
  • Hourly Rate : $48 ( 80% of $60)
  • Hours Per Month : 160
  • Annual Gross Pay : $60 X 160 X 12 ( Month) = $92,160
  • Monthly Gross Pay : $92,160/ 12 (Month)= $7,680
  • Hourly Rate : $12 ( 20% of $60)
  • Hours Per Month : 160
  • Annual Gross Profit : $12 X 160 X 12 (Month)= $23,040
  • Monthly Gross Profit : $1,920

Table 1 ( Gross Payment and Profit )

MYTH : Kartik thinks that he is earning a $92K per year and finds it truly a decent salary. Although, Karthik continue to imaging that his H1B employer ( sponsor) is unnecessarily making too much money viz., $2,000 a month in gross profit.

Tax

FACT : Kartik failed to recognize his tax liability. Kartik also thought that he would find a way to decrease his tax liability as he did in his home country.

Kartik – H1B employee’s Tax Liability
Dhokha Concepts – H1B Employer’s Tax Liability
  • 6.25 % Social Security tax on $92,160 = $5,760 annually
  • 1.45% Medicare tax on $92,160 = $1,336 annually
  • Annual Gross Pay : $60 X 160 X 12 ( Month) = $92,160
  • Monthly Gross Pay : $92,160/ 12 = $7,680
  • 10% Personal income tax on $92,160 = $9,216 annually

Total tax to be paid by Kartik to government = $16,312

  • 6.25 % of Social Security tax on $92,160 = $5,760 annually
  • 1.45% of medicare tax on your salary $92,160 = $1,136 annually
  • Annual Gross Profit : $12 X 160 X 12 (Month)= $23,040
  • Monthly Gross Profit : $23,040 / 12 (Month)= $1,920

Total tax to be paid by employer to government = $7,096

Table 2 ( Tax Liability)


Tax

FACT : Health insurance is very costly. A good quality health insurance for a family consisting of just two person will cost around $1,000 a month. Typically, 20% of the insurance premium is paid by employee and 80% of the insurance is paid by employer. So let us assume that the total monthly premium cost of such health insurance is $1,000. We are also assuming that employer is paying 80% of share, although our research indicate that most employer do not pay anything towards health insurance with 80-20 option.

 

Health Insurance ( Kartik’s share) 20%
Health Insurance ( Employer’s Share) 80% ( assuming you are lucky and employer agrees to it)
  • 20% monthly premium = $200
  • Total Annual Premium = $200 X 12 ( month) = $2,400
  • 80% monthly premium = $800
  • Total Annual Premium = $800 X 12 ( month) = $9,600

Table 3 ( Health Insurance )

Kartik’s ( H1B Employee) take home pay
H1B Employer’s take home profit for this employee
  • Gross Annual Salary : $92,160 ( See Table 1)
  • Minus tax : $16,312 ( See Table 2 )
  • Minus health insurance : $2,400 ( See Table 3)

Total = $73,448 take home annual pay
Monthly Net Take Home Pay = $73,448 / 12 (Month) = $6,120

  • Gross Annual Profit : $23,040 ( See Table 1)
  • Minus tax : $7,096 ( See Table 2 )
  • Minus health insurance: $9,600 ( See Table 3 )

Annual Net Profit = $6,344
Monthly Net Profit = $6,344 / 12 ( Month) = $528

Table 4 ( Take Home Pay)

H1B employee’s mindset is that Employer MUST pay during bench
Here is the H1B employer’s struggle
To pay Kartik (H1B employee) , on any given month employer needs to come up with the following :

  • $7,680 ( Employee’s gross monthly salary)
  • Plus $480 ( A month’s worth of Social Security Tax @ 6.25% that employer need to pay)
  • Plus $111 ( 1.45% A Month’s worth of Medicare Tax @ 1.45% that employer need to pay)
  • Plus $800 ( Employer side – Health Insurance Premium for a month)

Total = $9,071 is the total cost of employee per month

    Do you think employer can afford to come with $9,071 to run employee’s payroll for the month that employee was on bench ( means did not produce any earnings) ?

  • With the $60 per hour and 80-20 commission, the employer is making just $6,344 ( See Table 4) in a net profit yearly.
    By paying $9,071 to employee from his own pocket will wipe out H1B employer’s entire annual profit for this H1B emloyee. And it would be as good as running a charity.

It simply does not make any business sense !

Higher Rate

Some H1B employer claims that if we market you ( the consultant) at higher rate, your take home pay would increase and hence being on bench will not be issue. Yes ! This is true.. But you will not be paid a dime on bench, and may be you can survive on bench because you have earned enough and has significant savings. See the 80-20 analysis with $100 per hour rate.

Vacation Days

Some companies offer vacation days with 80%-20% or 90%-10% arrangement. This is slight hard to believe. How ? Let us assume that employee is also given 12 paid days. Meaning 12(Days) X 8 (hour) = 96 X $60 = $5,760. In this case the employer is making truly less. Refer to Table 4 above, annual profit ($6,344 ) MINUS expense of 12 paid vacation days ( $5,760) = $584 only !

Bench Salary

In 80%-20% scenario , your H1B employer barely makes $500 to $600 a month or may be around $6000-7000 annually. If employee comes on bench, obviously employer will not be in position to pay monthly salary to the employee. But if they do, which is as good as paying out of from own pocket, by all means this is a very fantastic employer and there is no harm in working for such a generous employer.

There is a strong argument ( We are sure the comments section below would be filled with that !!) that the math above is outright wrong. My employer agreed to 80%-20% formula and my employer is paying full salary on bench as well. How is it possible? The simple answer is that as employee you have earned it for your employer . Review following scenarios :

  • Employee worked on fixed salary ( where employer’s gross profit margin is much higher) for enough number of months that it has generated a enough cash cushion for employer. Hence, employer can easily absorb one or two months of bench salary.
  • Employee kept working on 80%-20% formula for consecutive 18 months or more, that has given enough cushion to employer to absorb one or two months of salary during bench. In fact, you ( H1B employee) have earned enough that you don’t even care !
  • Employee never knew hsi/her true rate, employer said that we are getting paid $80 and employee believed it. Instead of asking a verifiable proof, some employer goes extra mileage in cheating their employee by providing a copy of forged purchase order/invoice. Now a days these POs/Invoices are signed electronically and it is available in a PDF format. Hence, very easy to modify. Forwarded emails are even more easy to forge. And , some employer would say look I am gonna call the vendor in front of you and he would tell me how much we are making. Sometime , this would be a scripted call, where that vendor is already prepped ahead about what to say in that particular phone call. If employer is 100% genuine ask the H1B employer to give a notarized statement that H1B employee’s hourly rate is genuine one. Those genuine ( like us Agile Attributes ) will sign right away and those fake and cheaters will provide endless reasons why they won’t !

Also, understand that if your employer is telling you we do pay , and we are obligated to pay you anyway then you have to make sure that you don’t fall in to the bench traps or the same company is making wishy-washy talk that we don pay our H1B employee salary during bench.

Pros and Cons of 80%-20%

The 80%-20% agreement usually happens orally (nothing has been put in writing) has following advantages and disadvantages.

  • Employee is getting paid more and by doing so the H1B employer is indirectly transferring the certain risks to H1B employee. Those potential risks are no relocation cost, no bench pay , no paid vacations etc. If employee puts more number of hours at work , employee gets paid more. However, if client is observing holidays or if employee gets sick it would result in less income that month.
  • For employer there is absolutely no buffer of cash cushion left to keep paying H1B employee on bench. Eyeballing the $60 (Hourly Pay) X 160 (hours a month) X 12 (month) = $115, 200 and thinking that employer is making too much money is a wrong perception. If you are fresher, don’t have any savings in USA , such H1B employee would be better off by negotiating somewhere around $80K fixed salary with full benefits. With 80%-20% equation your gross pay is $92K, however by paying around $1,000 per month to H1B employer, and keeping the fixed salary of $80K , the H1B employee is buying a peace of mind.

However, many employers who promises to pay on bench do not pay a dime even with a fixed salary option. In this case one must opt for 80% billing rate because anyway you will not be paid any money. Majority of H1B employer knows that they must pay you the salary , but ensure that you are not part of the bench traps.

Tax

There is absolutely no right answer that 80-20 concept would work better than the fixed salary and vice-versa. But, you must know that if you are on H1B visa and working in USA , and your H1B employer ( the visa sponsoring employer) refuses to pay you the salary ( whether you have some deal of 80-20 or some fixed salary)then such employer is violating the law. Your H1B visa employer must pay you the monthly salary. And that monthly salary must not be some $500 or $1000 stipend , it must be your regular salary listed in your offer letter. By not having paycheck in your hand, those scumbag employer who want to take revenge on you may inform USCIS that look this employee is on our H1B visa, we terminated his employment , and requested him to return to his home country but he refused to leave. And for your kind information he is still in this country, claiming to us ( H1B employer) that he is on vacation , however technically he( Nishit) is out of status. We are genuine employer and it is our duty and responsibility to ensure that we keep you updated. By informing USCIS , scumbag H1B employer is trying to play nice guy role to the Immigration authorities while screwing you badly under the hood !

Keeping 90% or 80% billing rate may give H1B employee tremendous earning power. However, if H1B employee remains on bench for 2 to 3 months than that power of savings is gone. If you are confident that you can find the next assignment very easily than 80%-20% is the rule to RULE ! However, you must weigh-in these factors to determine what works best.

Last but not the least, H1B employer also need to make some money to keep the lights on and feed his family. So if employer is genuine like us ( Agile Attributes ) and many others who believe in open and honest communication, you need to treat such employer with dignity and respect and allow them to make some profit out of you because nothing is FREE in this world.

If you are in USA and on H1B visa willing to transfer your H1B visa to the genuine employer like us, drop us an email at jobs@agileattributes.com and if you feel that we helped you in demystifying this 80%-20% rule, please spread this positive vibe to many others. If you are on H1B and in good hands of kind H1B employer , please send us the contact information of such a nice employer.

We are thankful to Nishit Gajjar, Kartik Barad and many others whose endless questioning about 80%-20% options inspired us to write this article.

Reference : CNN Money article :
You make $70k but cost your boss $88k

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