>Is there any downside to moving to part-time vs. moving to be independent?

I've done this a couple of times actually without problems. I explained that my day job came first, and it wasn't a problem with the other company. FWIW, I had about 14 years and left on good terms the first time I did it. They eventually hired me back and then I worked on the side for the other.

>I had expected to go 1099 but they have suggested that they would prefer to have me stay on the payroll as a part-time employee...I assume I will have a smaller tax burden if I stay as an employee.

I'm not sure I see how your taxes would be different either way. Depending on your tax bracket the extra income could move you into a higher tax bracket. As a part-time employee, it may be harder to declare your expenses against your income (kinda guessing with that statement actually). Another idea is to form a corporation, and you might be able to reduce your tax rate somewhat (but in the end you pay yourself out of the corporation, so it's probably a wash). Forming a corporation would also serve to limit liability. Although I've heard that strategy isn't always bullet proof, it helps me sleep easier. FWIW, I eventually formed a C corporation and feel like it's worked out well so far.