W-2 vs 1099, which is better?
Are you debating between taking a 1099 job vs getting paid on W-2? We’ll walk through the most common things you should know to make that decision!
“Just tell me what to do” - ok! Here’s the TL:DR
In most cases, a mix of W-2 and 1099 during the year is the best of both worlds. You have income to deduct your expenses against, but also have someone else paying half of your SS taxes for part of your income
You’ll want to be 1099 when you expect to have a lot of out of pocket expenses to earn that income
You’ll want to be W-2 when you have little to no expenses relating to that income so that the employer is paying more of your SS taxes.
*Important note!* There are laws that govern the difference between being an independent contractor or an employee based on many factors. You don’t always get to decide, but sometimes you can structure the role in a way that allows you to be one or the other. This guide is designed to help you understand the tax impacts of that choice and is not intended to override the department of labor laws that govern that distinction!
First, Let’s define a few terms so we’re speaking the same language
“W-2”, aka “employee” aka “wages” - This means that the person paying you is treating you like an employee for tax purposes. They will withhold taxes from your pay, and will issue you a form W-2 at the end of the year.
“1099” aka “independent contractor” aka “freelance” - This means that the person paying you is treating you like an independent contractor for tax purposes. They will not withhold any taxes and will issue you a form 1099 at the end of the year. You are responsible for reporting this income whether or not they issue a 1099.
What’s good about being a W-2:
While you may love the freedom of self employment, being a W-2 comes with a few benefits from a tax standpoint:
Taxes are being withheld from your checks - Having a hard time putting aside money for taxes? With W-2 employment, you don’t have a choice, your employer takes those taxes out before you get your money. For some this is annoying, but for others it can be very helpful!
Your employer is paying part of your taxes - As a self employed person, you pay a roughly 15% tax towards social security and medicare. As an employee, the company that hires you is paying half of that, so you’re paying half the rate!
You’ll get paid on time! - There are much stronger legal protections for employees with respect to getting paid on time than there are for freelancers, so if you absolutely need each paycheck to arrive on schedule, W-2 might be for you.
You might be eligible for health or retirement benefits - Full time employment often comes with the availability of health insurance paid by the company and participation in the company retirement plan
What’s good about being a 1099:
While you may love the freedom of self employment, being a W-2 comes with a few benefits from a tax standpoint:
You can write off expenses! - When you’re self employed you have the ability to write off expenses against your income. In cases where you have a lot of expenses directly related to earning that income, it can be enough of a deduction to offset the fact that you’re paying the extra SS tax when compared with W-2.
You might pay less taxes - Depending on your entity structure and deductions, it’s possible to pay less tax overall than a comparable amount of income that was just on W-2. This one’s not a guarantee, but in cases where you have a lot of deductions that you wouldn’t otherwise get to take, it can be a big savings.
You have more control of how and when you do the work - 1099 generally offers more flexibility in timing, rate and schedule than W-2 does because the person paying you will want to make sure the relationship looks “independent” to avoid you being classified as an employee. This can be to your benefit if you’re someone that likes that flexibility!
Why not both?
In many cases, a mix of both 1099 and W-2 income will allow you to deduct expenses against your income, while still having someone else picking up some of your Social Security and Medicare taxes. This is especially the case where you’re organized as a sole proprietor or single member LLC, but when you’re an S-corp, it’s sometimes less efficient to have a mix (you’d want all 1099)
Not sure what to do? Please reach out and ask us! This guide is to give you the right things to think about, but we’d love to discuss it with your specific circumstances in mind.