Should I work as a salaried w2 employee or a 1099 contractor?

Question

I started working for a company and they offered me $53 /hr on W2 or $55 on 1099.

That employer is suggesting me to take salary on 1099 so that I can save more taxes rather on W2. He asked me to start a consulting company so that my company expenses can be shown on it. I can include my wife as the working partner so that it will be beneficial.

Could you please guide how to proceed.

Thank you,

Shiva

Answer

I suggest that you read this IRS publication: Independent Contractor (Self-Employed) or Employee?. Determining if someone is an employee vs a contractor is not arbitary and your employer may be breaking the law by suggesting that you take on the job as an employee.

Personally, I would take the job for $53/hr because:

  1. As an employee, your employer pay for half of the Social Security and Medicare taxes at 6.2% and 1.45%. This alone reduced your effective income by $4.2 an hour (so you effectively make only $50.80 per hour)
  2. Your employer doesn’t have to pay you any benefit if you work as a contractor, e.g., no vacation days, no personal days, no sick days, no retirement plan, no health insurance, no dental insurance, no vision insurance, etc. You get the point.

Basically, your employer will be saving a ton of money if you chose the $55/hr contractor option.

Pinyo

About the Author

By , on Jul 20, 2012
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Leave Your Comment (10 Comments)

  1. Jenny says:

    If your employer told you that, you need another employer!

    $53/hr on a W2 is WAY, WAY, WAY better deal for you. Your $2/hr will not be enough to make up for employer taxes and whatever benefits you may qualify for. Not even CLOSE.

  2. I worked for a non profit organization for an after school program. Everyone who taught or worked the after school program was a 1099 contractor. In my role as the program coordinator, I was expected to work from 3:30-5:30 and I had a clear job description and job duties I had to perform like attendance and time keeping for the other contractors. We all felt like we got screwed cause we owed taxes at the end of the year or we didn’t get much back. Should we have been considered 1099 contractors?

    Sally Stretton

    • Jenny says:

      That was a pretty flagrant violation of contractor law. You’re a contractor if you can decide the manner in which work is done. Obviously, in this instance, you couldn’t.

      You didn’t get screwed because you “owed taxes”–whether you are paid on a 1099 or a W2, you will owe taxes–except for the self-employment tax, which you should not have had to pay.

  3. Squeezer @Personal Finance Success says:

    It doesn’t sound like he can legally make you a 1099 contractor. There are several criteria to be a 1099 that it sounds like you do not qualify for, because your boss will be defining your work location, defining your work tasks, and setting your work hours.

    • Jenny says:

      Not *entirely* true. If you take on a housekeeper who brings her own materials and determines how the work is done, she is still a contractor even if she shows up at the same time every week that you have scheduled with her because it’s by mutual agreement, not you dictating to her.

  4. Pinyo says:

    You may want to look into Equal employment opportunity (EEO) laws. If you’re the only person not receiving the benefits, it might be discriminatory, and it might cause the benefits paid to other employees to become taxable.

    Take a look at this article: http://www.techrepublic.com/ar.....employees/

  5. shiva says:

    Thanks Pinyo & Lance for your comments.

    Where as my employer confirmed me that he will not pay any benefits (not even leaves/health insurance), he asked me to take care of my self. He will pay only $53 /hr on W2.

    • Jenny says:

      Unless no one in the company gets benefits, INCLUDING HIM, he can’t do this. Retirement plans are especially aggressive about including all employees, once certain conditions are met.

  6. Lance says:

    I agree with Pinyo on this one. 53 an hr for W2 vs 2 dollars more for 1099 is definitely not worth it. I’d say they should almost double your rate if you’re going to be 1099 personally.

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