w2 vs 1099

In general, either you are an employee or you aren't. Although the company may give you a choice, its the circumstances that dictate the correct classification.

Remember that you will have to pay state and federal income taxes plus self-employment tax on the extra $8 an hour.

Your employer will not be giving you any benefits, so there will be no before-tax health insurance benefits. If you go the W-2 route, you can only subtract health insurance premiums if you itemize and all of your medical deductions exceed 7.5% of your AGI. If you go the 1099 route, you can take a self-employed insurance deduction without itemizing as long as you were not able to participate in a subsidized health insurance program sponsored by your or your spouse's employer.

Being self-employed may also allow you to start your own 401(k) or Keogh retirement plan.

But if your employer is offering you a per diem, does that mean there will be substantial expenses you'll be expected to pay yourself if you go with the 1099? Or is you employer offering to let you bill actual expenses in addition to the $88 per hour?

thanks a lot everyone. my wife is full-time so i don't need health insurance benefits.

lasgaspjr, Appreciate your help. Thanks for your time. I didn't get your last question- there won't be any expenses i will be expected to pay myself either on w2 or 1099.

lastgaspjr said:   Remember that you will have to pay state and federal income taxes plus self-employment tax on the extra $8 an hour.

Your employer will not be giving you any benefits, so there will be no before-tax health insurance benefits. If you go the W-2 route, you can only subtract health insurance premiums if you itemize and all of your medical deductions exceed 7.5% of your AGI. If you go the 1099 route, you can take a self-employed insurance deduction without itemizing as long as you were not able to participate in a subsidized health insurance program sponsored by your or your spouse's employer.

Being self-employed may also allow you to start your own 401(k) or Keogh retirement plan.

But if your employer is offering you a per diem, does that mean there will be substantial expenses you'll be expected to pay yourself if you go with the 1099? Or is you employer offering to let you bill actual expenses in addition to the $88 per hour?

bretta said:   For clarity, employers don't get to legally choose between W2 and 1099, any more than they get to choose whether to pay minimum wage or not (I know there are exceptions, but used to illustrate a point). If they get to direct your time, working conditions, and generally when you work, you are an employee and should get a W2. If you get to set when, where, how, and on what specifically you work on, then you are truly an independent contractor and should get a 1099.This seems to re-occur with each "1099 vs W2" thread.

The OP is clearly being given the choice so why not just answer the question?

Whether it is legal or not for employers to give the choice is something the employer needs to worry about, not the OP. He is not at risk.

I've worked for over a decade on multiple jobs that according to your test make me a W2 employee yet I've always been paid 1099.

In my area there are many staff augmentation companies that give contractors the option of being paid as either unbenefited W2 employees or 1099 subs. If this is illegal then there are large numbers of companies that are acting illegally, openly in plain sight.

BlueSeaLake said:   The extra $8 won't even cover the extra taxes you will have to pay as a 1099You are incorrect.

OP will pay 15.3% in combined SS/Medicare taxes if he is self-employed, 7.65% if W2, so it only costs an additional 7.65% in taxes if you are SE.
A 10% increase (1099 vs W2) will more than cover it.
That doesn't even consider that at his salary he will exceed the annual cap on SS at which point the differences are even greater.
(The temporary 2% payroll cut reduces both so it is a wash, doesn't change the numbers)

especially when you consider the effort you have to do for them each month (forget and pay penalties) and your time is worth $80/hr.
The self-employed have to make 4 quarterly estimated tax payments each year, nothing monthly.

For the feds, this quarterly "effort" consists of going to https://www.eftps.com/eftps/ and telling them how much to ACH from your checking account for that period. Most states have a similar method that is equally arduous.

In return, you get the opportunity to deduct business expenses that you can't as a W2 and you can contribute 10x as much to a retirement plan than the W2 route would offer, both of which can save you thousands in taxes.

winter said:   BlueSeaLake said:   The extra $8 won't even cover the extra taxes you will have to pay as a 1099You are incorrect.

OP will pay 15.3% in combined SS/Medicare taxes if he is self-employed, 7.65% if W2, so it only costs an additional 7.65% in taxes if you are SE.
A 10% increase (1099 vs W2) will more than cover it.
That doesn't even consider that at his salary he will exceed the annual cap on SS at which point the differences are even greater.
(The temporary 2% payroll cut reduces both so it is a wash, doesn't change the numbers)
Not quite. Remember that the extra $8 an hour is itself taxable and taxes are paid out of after-tax money. So on that extra $8 he will pay federal income tax (let's say 25%), state income tax (let's say 5%), plus self-employment tax (15.3%), for a total of 45.3%. So he only has $4.38 left with which to pay self-employment taxes on the original $80. This won't cover self-employment tax until after he reaches the annual cap.

And remember that in a later message he explained that only $62 would be taxable if he took the W-2 because of the per diem.

especially when you consider the effort you have to do for them each month (forget and pay penalties) and your time is worth $80/hr.
The self-employed have to make 4 quarterly estimated tax payments each year, nothing monthly.

For the feds, this quarterly "effort" consists of going to https://www.eftps.com/eftps/ and telling them how much to ACH from your checking account for that period. Most states have a similar method that is equally arduous.

In return, you get the opportunity to deduct business expenses that you can't as a W2 and you can contribute 10x as much to a retirement plan than the W2 route would offer, both of which can save you thousands in taxes. I think he may have been thinking of the effort to calculate the amount to pay each quarter, which can be simplified by simply using the previous year's tax. In any case, the federal penalty is tied to the interest rate that the federal goverment pays to borrow. The current penalty rate is an annualized 3%. In other words, even if you screw up, the penalty is going to be trivial. Some states, however, have higher penalties.

winter said:   bretta said:   For clarity, employers don't get to legally choose between W2 and 1099, any more than they get to choose whether to pay minimum wage or not (I know there are exceptions, but used to illustrate a point). If they get to direct your time, working conditions, and generally when you work, you are an employee and should get a W2. If you get to set when, where, how, and on what specifically you work on, then you are truly an independent contractor and should get a 1099.This seems to re-occur with each "1099 vs W2" thread.

The OP is clearly being given the choice so why not just answer the question?

Whether it is legal or not for employers to give the choice is something the employer needs to worry about, not the OP. He is not at risk.

I've worked for over a decade on multiple jobs that according to your test make me a W2 employee yet I've always been paid 1099.

In my area there are many staff augmentation companies that give contractors the option of being paid as either unbenefited W2 employees or 1099 subs. If this is illegal then there are large numbers of companies that are acting illegally, openly in plain sight.

They do until someone files a complaint as happened to Microsoft. On a typical series of audits probably 60+% of employers misclassified employees as independent contractors. Of those caught only 3% won and overturned DOL on appeal. Biggest reason is unemployment taxes are highest for those who misclassified. You get this type of employer and they probably are abusing their personal tax returns as well.

They are also trying to avoid pay for overtime.

Folks, thanks for a healthy discussion.

We've previously discussed this topic, although you'd have to look in the archives to find it. In short, if you are an independent contractor and receive a 1099 as opposed to a W2'd employee, there are fairly significant difference between the two. For starters, as others have already mentioned above, W2'd individuals have their employers paying 1/2 of the social security and medicare tax (in 2012, employers pay the usual 6.2% but employees enjoy a temporary reduction to 4.2%). If you are 1099'd, you pay the whole thing yourself, which causes your taxes to go up by the 6.2% SS tax (up to $110,100 in taxable wages this year) and 1.45% Medicare tax (there's no wage cap on it).

You also lose access to sick leave, vacation pay, holiday pay and various other benefits provided by the employer, such as 401(k), employer retirement contribution match, if any, ability to pay various qualified expenses on a pre-tax basis (FSA medical and dependent care, health care contributions, qualified transportation expenses, etc...) if the employer is properly set up under its cafe 125 program, etc...

Depending on your state law, losing your W2'd job will typically entitle you to unemployment compensation, whereas an independent contractor often won't be entitled to any such compensation.

The list of things goes on and on. This is not to say that being W2'd is always a better deal (it is not) but you do have to factor all these variables into the calculations. In short, although the exact percentages will obviously vary person to person and situation to situation, the rule of thumb, however imprecise, is that an independent contractor's compensation has to be about 30% or so higher than that enjoyed by a W2'd person in order for their net compensation to be about the same. Having said that, since the OP mentioned that his W2'd position would come with no benefits, if accurate, the financial difference between the two would obviously be quite a bit smaller.

spnj said:   opportunity to deduct business expenses that you can't as a W2 and you can contribute upto 37K in 401k+SEP IRA than the W2 route would offer, both of which can save you thousands in taxes.FYI, at the annual income you mentioned the solo 401k would give you a chance to contribute more, $175k in income allows the full $50k deduction in the solo 401k, whereas the SEP IRA limit would be $33k.

Check out the Self-Employed Contribution Calculator link on this page

Fidelity is an excellent choice for setting up a solo 401k IMHO.

spnj said:   riznick said:   why?

as winter said, opportunity to deduct business expenses that you can't as a W2 and you can contribute upto 37K in 401k+SEP IRA than the W2 route would offer, both of which can save you thousands in taxes.Just to clarify something, if the employer is set-up with its cafe 125 plan, then as a W2'd employee your health insurance premiums are already pre-tax, so the independent contractor route is only advantageous for that if the employer does not give you the ability to have your health care premiums deducted on a pre-tax basis (or if you are purchasing an individual health policy on your own).

Likewise, if you are W2'd, only the employee contribution is limited to $17,000 in 2012. The employer can still offer a match, offer profit sharing to be contributed in your retirement accounts, etc...

In other words, the above are not independent contractor vs. W2'd employee advantages. They only become advantages if the employer just doesn't offer certain "standard" employer benefits.

winter said:   $175k in income allows the full $50k deduction in the solo 401kJust as an fyi, the $50,000 contribution limit is the Section 415 limit, which is the same regardless of whether you have a solo 401(k) or if you are an employee and have an employer sponsored 401(k). With the latter, in 2012 you'd be subject to the Section 402(g) limit of $17,000 in employee contributions (which is also subject to the employer plan passing the highly compensated employee test, which it can do, among other ways, be offering a "safe harbor" match) and the employer can then contribute the rest up to the full Section 415 limit, provided, of course, that the rest of the Title 26 requirements are complied with (such as the total of the profit-sharing and matching contributions not exceeding, I believe, 25% of the employee's gross compensation, etc...).

Not sure what do you mean by protection?- Unemployed insurance?enc0re said:   W2 for the employee protections alone. This is a no brainer.

In your case, the other option is W2 with no benefits so the classic discussion of W2 vs 1099 doesn't apply here.

No need of health insurance, like to contribute more to retirement - leads to 1099. Buy a term life insurance and protect your family, if you don't have one already.

But, shift to W2, when you like to buy a home etc., or raise a loan on wife's W2.