HomeCareerConsultants: 1099 or W-2?

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Consultants: 1099 or W-2? — 46 Comments

  1. Interesting blog post but the overriding choice of whether one is W2 or 1099 is the Scope of Services in the Contract. In order to qualify for independent contractor status you must have a large degree of autonomy from the employer. They should not be able to control your schedule or activities. I know you touched on this with your reference to the IRS posting. As a consultant, a lot of it involves being the master of your opinion. I will not allow a client to tell me which application should be used for a specific task, I will be open to suggestion but I retain the right of final decision.

  2. I just stumbled on this post and really appreciate the time and effort you put into it. I’m currently a consultant employed directly at a mid sized consulting company but have been thinking about going it on my own. This information is very useful to me as I evaluate contract opportunities in the future.

    Thanks,
    Ken

    • Glad to help Ken. I’m working on another blog that compares Permanent/Salaried/Full-Time vs Contractor/Consultant (W2 or 1099). The conclusion will be you can make a lot more money as a contractor/consultant 🙂

  3. Pingback:Salaried employee vs contractor | James Serra's Blog

  4. I am confused about deducting expenses for 1099. As a 1099 contractor am I subject to nonreimbursed expenses @ 2% of AGI? Or are my eligible expenses deducted directly from AGI on 1040? My company is reorganizing and offering us option to stay on as 1099 instead of W-2 but I am stuck on this as my spouse has a decent salary so if I am working PT/1099 and can’t deduct expenses until they reach 2% of AGI that might make a big difference.

    • Hi Peggy,

      As a 1099 contractor I don’t believe you are subject to the limit of nonreimbursed expenses at 2% of AGI, but I strongly suggest talking with an accountant so it is clear.

  5. In October of 2011I hired in to a company I had worked for in the past. I had worked both as a consultant and as a full time employee. This time they said they were not hiring consultants but they would put me on what they called temporary part time. There were no benefits but they would pay the taxes and FICA. I discovered later they were also paying into a retirement program through Fidelity. My total take is well over $100,000 plus I am on Social Security. My boss has mentioned putting me on as a full employee but he can’t get approval for a position at that level.

    As I am working my way through my taxes I wonder if I can call myself a contractor or am I actually a full time employee without benefits. I do a lot of work at home and have a seperate office and would like to claim all the expenses. I could save a lot in taxes if I could call myself a contractor.

    In January they changed their mind and I am now working through Manpower so next year the game changes again.

    Any Thoughts,

    Larry

    • Hi Larry,

      Find yourself a good accountant to deal with your questions. I found a great accountant who has saved me much more money than if I tried to do my taxes on my own, not to mention saving me a ton of time.

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  7. James,

    Thanks very much for walking through the cost analysis of W2 vs 1099. Your points seem consistent with what I’ve experienced in the past, and helped me define my salary requirements for 1099 job leading to full salaried job.

    • Not really, you can and should pay into unemployment. You can pay yourself a paycheck and have them pay all of the required taxes including unemployment insurance. That’s what I do as a corp – I’m sure a 1099 can do likewise. I have Wells Fargo and they provide this service for like $50/month (AKA $0.30/hr).

  8. Thanks James for taking the time to write this. Based on this can you suggest if my move to move from W2 to 1099 is justified.

    I get paid at 60/hr and my employer take flat 20% and gives me 48 dollars per hour on W2 with a 4 dollar tax free per diem. I pay my full insurance which is before tax

    With moving to 1099 will I be paying 13.3% in self employment taxes or 50% of that. And considering that I pay my own insurance I might be better off doing 1099 based on the self employment taxes

    W2: For 170 Hours @60 (Employer paying 48 with $4 per diem and me paying insurance) = 6400
    1099: For 170 Hours @60 with paying 750 dollars of insurance what would my net come to?

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  10. Jamie – This is very helpful. I’m currently working as a w2 consultant for the first time, and am considering taking another offer, but it’s a 1099 contract. I knew I would be paying my own taxes, including the part paid by the employer in a w2 situation, but didn’t have this level of detail. Great information!

  11. I just graduated with my Masters degree and got an internship for a small start-up company. They are paying me as an independent 1099 contractor (no taxes withheld). They are paying me a set amount for the total contract, though I work a typical 40 hr week. It’s a 2 month contract and it expires in a few weeks.

    It was intended to be contract-to-hire and I feel optimistic based on my contributions so far. Since I’m nearing the end of the contract, I’ve been trying to research what I should expect when we renegotiate my pay. I’m not sure what the complete benefits package is yet, so I will have to determine its value, subtract that from my current rate, and set that as a minimum expectation. Would that be fair? It’s my first contract job and hopefully my first FT w/ benefits position. It seems as though W-2 an apples-to-apples switch to FT and 1099 is quite different. This article sets me on the right foot..thanks!

    Another Question:
    – Since my contract is only 2 months, will I still have to pay the next quarterly taxes in January?

  12. A material fact is whether you might be subject to an additional tax category as an independent contractor, i.e. in Hawaii most likely you will be liable for the 4% General Excise Tax on gross income, which is applicable to almost all transactions.

  13. I was hired and never was told by the owner that I got paid $40 per diem but if the commission was more than the per diem he would pay commission instead. $40 a day for 7hrs came to less than min. Wage. I never received an explanation of how I would get paid just instructions regarding responsibility in dealing with Customer purchases.
    He call his employees Consultants and give them 1099’s. However store hours are posted in front of the store (10 am to 5pm). I recently quit this job because he would not paid my sister for her hours. Knowing that we were working together. He accepting her employment application and mine. He still owes his commission for the month of October.

    What is your opinion regarding our disbut? Paying less than min wage. Per diem is a real estate term he came up with.

    We look forward to hearing from you. We live in California.

  14. Great information, thanks! The question I have is regarding state taxes. Are there any state tax implications in 1099 vs. W2? I know state taxes/tax law vary by state, but perhaps you may know a general yes/no to the question.

    Also, I’m trying to flip the order in the above comparison rate example because I’d like to know what I would need to make on a 1099 to equal out my current W2.

    • Hi Samuel,

      I have been lucky and have not had to deal with state tax, but I would expect it would work just like federal tax, where the employer pays their portion if you are W2, but you pay the employers portion if you are 1099.

  15. If you have not worked all year and was just offered a freelance/temp job for Dec (and on into 2013)… but for the current tax year, I will only be working one month…. earning about 8K. is it better to go W2 or 1099? If I recall, there was a min of $5000 for SS/MC for 1099? Or was that a max?. i don’t want pay over 1/2 of that in SS tax if i do 1099 for that one month? but would rather for the long run so…. Any help?

  16. Pingback:Consulting company: Perm/Salaried vs 1099/W2 - SQL Server - SQL Server - Toad World

  17. Hopefully this blog is still operating. It is very informative. Now, my situation. I am 57 and have not built up enough for retirement, which is in 401ks. I have recently obtained employment with a small company who after initially calling me an independent contractor, gave me a letter stating the wage, >$100/hr, that I was a W2 employee, but that I wouldn’t be eligible to participate in any benefits, 401k, etc. Well, my health is covered by my wife, so no sweat there, but I have a problem with my retirement. I have to build it up, but won’t I be limited to just the IRA? I mean, I will now have sizable taxable wages and no way to reduce the taxes. Thanks, Mark

    • Hi Mark,

      There are other ways to build your retirement besides your IRA. There is an individual 401k and SEP (simplified employee pension plan) as two possibilities. You can also create your own company and start a 401k. Talk with a good accountant about your options.

  18. The so called self employment tax is not the only advantage to working 1099 (or C2C). As a business there are various expenses you can write off that you will not be able to do once you sign onto a W2 position. Things like home office deducation, meals and expenses, business expenses like insurance, internet, etc. are all not available to you because you’re essentially an employee when you’re on W2. As a single guy without the wife, kids and house to supplement my tax deductions, my business deductions are all I have. For me to go W2 will mean I will have to shut down my perfectly profitable business and lose all of those deductions.

    Additionally, as an S corp, there are additional tax savings as you pay yourself a salary which is taxed much more heavily than the tax you pay on the remainder of your corp’s revenue. Granted reporting requirements are much higher so you should get yourself a good CPA. Mine costs me about $1500/year but even in the first year he saved me like $15-$17K so it’s well worth it.

    Additionally, you must ask yourself exactly what quality of healthcare and other benefits are you gonna be receiving from essentially this new employer and more importantly how long will this relationship last?

    I’ve been consulting off and on for some 25 years now. And it’s been my exact experience that I have never, I repeat NEVER, been placed a second time by the same consulting firm (‘cept my own corp that is). So if this is a 6 month contract with the possibility of extensions you must first throw out that possibility of extension as that’s not in writing – IOW assume it won’t happen – and then think that all of those benefits and things like 401K plans will be going away. You’ll be looking for new healthcare insurance, etc. You probably won’t vest in the 401k plan and many companies won’t match contributions until say 6 months or a year. So you get absolutely no extra benefit from your W2 employer’s 401k plan except the wonderful duty of a having to roll it over once they boot you out the door. That and you’ll be stuck with the meager choices that restrict your selection of 401k investment options to a bitter few. Instead open up an IRA and be open to 3000 or more mutual funds that you can choice from.

    It used to be when you were employed by a consulting company that if your current assignment ended you’d be “on the bench” making a somewhat reduced salary from the consulting firm until they placed you again. This was their incentive to get you working again and bringing in $$$ for them. That’s no longer the case (why did we allow that to disappear?). Now you get “W2 with no benefits” to which I always ask “What’s the point?”.

  19. Pingback:Independent consultant: How to find work - SQL Server - SQL Server - Toad World

  20. Hi James,

    Just came across your blogs and this is what I’ve been looking for a long time. I’d really appreciate your times and your knowledge on this. I’ve been working as a salary employee in my whole life for 15 yrs. I also had side contract as 1099 to my S Corp a few years ago but it’s closed now. I was always afraid to go for contract full time as it’s not stable and I can’t afford a couple months off. But after reading your post, I think I would try it now. I’m making 120K/year with 15K medical/dental paid by the company, and 3 weeks vacations, 11 holidays, 10 sick days. Do you know if a 1099 contract rate of $80/hr would be a fair start for me?

    Thanks,
    Justin.

  21. Pingback:Forcing a contractor to go W2 - SQL Server - SQL Server - Toad World

  22. Hi James,

    I’m working under a 1099 form and was hired for a job, it’s been over 60 days and I still haven’t been payed by the contractor, their delayed was making the invoice. what do you suggest I do?

  23. I have a job offer paying with a w-2. The hourly rate is 34.00 dollars an hour with no benefits. The total hours for the 12 month contract is 2080 hours, not counting over time when needed. What should my hourly rate that I should charge per hour to include my benefits that I will be paying my self. ( benefits, 401k, Medical, sick days, vacation days and federal holidays.)

  24. Thanks for this post James. It’s very succinct and helped me put together my conversion table in preparation for figuring out an appropriate 1099 rate.

  25. I do consulting work and get paid on a 1099. I put 1/3 away in my “business account” and pay quarterly taxes. I pay for my own medical insurance. At the end of the year my accountant does my taxes, I pay what ever else is owed out of my “business account” and the balance is basically my “tax refund”. I am considering taking a job on a w2. I will still have to pay my own medical because they do not offer any. So now the money I would put away to pay quarterly taxes would be non existent because taxes would be with held by the employer. Do you think my “tax refund” would still be close to the same if the salaries are the same?

  26. I’m in a situation were I may get a contract through a recruiter. Terms are 6 months with a potential to hire as an employee, and w2’d through the recruiter. Recruiters like to make it sound like getting a w2 is a good thing, and one thing they put out there as a benefit is health insurance. Honestly though, for anyone who does contracting this is not a good deal. Why would I start and stop on different plans. Not to mention that like most employer plans, I would still have to pay into it. Obviously at a lower rate in all likelihood.

    Fortunately I signed up with a plan, via healthcare.gov, that meets my needs. If I had my choice I would rather just get a 1099 and keep my health plan “portable”.

  27. I’m going into the IT staffing business solo and need one piece of info:

    If I’m paying 10 consultants/contractors 50 per hour w2 in Colorado, what is my share of their tax burden?

    Example: John Doe gets 50hr w2, I withhold his taxes obviously but what % tax do I have to pay on top of that to gov/contribution?

    thanks for a quick response!

    Steve

  28. If I have an LLC does this make the 1099 a better option? I thought I read somewhere in there that if you have a corporation you don’t have to pay the additional self employment tax?

    If not then I think the W-2 makes the most sense…

  29. Thank you, James! This is a great article – detailed, to the point, and provides very helpful links. Clearly this article continues to be helpful 4 years after you wrote it. Spot on for me!!! I googled a question and stumbled on this, which answered almost all my questions and puts me in a position to be able to make an informed decision. Your list of pros vs. cons and and break down on the numbers is priceless. Thanks again! You rock!!!

  30. Who provides liability insurance for a W2 employee. Does a w2 employee need to purchase their own general liability plan or are they covered by the firm’s general liability plan?

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