Hourly Rate Conversion 1099 vs W2

[GatorCHOMPions]

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I currently work a 1099 making $225/hour per diem. I do the max for a solo 401k. I'm looking at switching to a W2 making $205/hour. From a strictly take home pay perspective, which is better? Is it just about adding/subtracting half of the FICA taxes? I already get benefits through my full time job.

Apologies if this has been discussed, I tried using the search tool.

 

[BoardingDoc]

I currently work a 1099 making $225/hour per diem. I do the max for a solo 401k. I'm looking at switching to a W2 making $205/hour. From a strictly take home pay perspective, which is better? Is it just about adding/subtracting half of the FICA taxes? I already get benefits through my full time job.

Apologies if this has been discussed, I tried using the search tool.

Any 401k matching at the w2?

Solo 401k = 69k. Reg 401k = 23k. Delta = 46k. * max marginal rate (37%) = 17k saved in taxes by being 401k.

You're up 17k as a 1099.

If you get a 401k match, subtract that amount from the 17k.

FICA costs = 7.65% of $168600 = 12897

Subtract that from whatever number you're at above.

If you're positive, 1099 is winning. Negative, W2 is winning.

At this point, you should add in the value of any W2 benefits such as health insurance, life insurance, disability etc, but you said you already have that so it likely doesn't matter... UNLESS your w2 allows you to take a higher hourly rate in exchange for completely foregoing those benefits. Most places won't let you do that, but some do.

There is likely some value in taking the W2 life insurance/disability benefits even though you'd be double covered at that point so determining a valuation is very case specific.

Hope that helps.

 

[JacobMcCandles]

It depends what benefits you’re getting with the W2. A financially savvy person would be better off taking the 1099 job if all else is equal. A general rule of thumb is that the 1099 hourly should probably be 20-25% more than the W2 hourly but there’s just too many variable. Since you said you get all your benefits from your full time job then the 1099 is likely the better choice but it always depends on the other actual numbers.

 

[Porfirio]

I calculated my per hour difference between W2 and 1099 was ~$28 an hr (tax difference and benefits cost).

Most of the time - 1099 is the way to go because even if the W2 has benefits you carry a larger cost sharing for those benefits.

 

[cyanide12345678]

What benefits do you get from the w2? Hard to answer that question without knowing that answer.

As a ball park w2 benefits are usually worth about $20/hr.

Here’s an example of what my w2 benefits are worth:

1) health insurance, dental insurance, vision insurance, life insurance, disability insurance. Id roughly have to spend an extra 25k a year to buy the equivalent insurance for my family especially since now my wife is 1099 so i can’t just get on her insurance.

2) i get $13-14k as a 401k match.

3) $5000 cme

4) $1500 for licenses and renewals

5) employer 1/2 of social security and Medicare taxes - 17k

6) i also have access to a 457 which I’m maxing saving me some 8k in taxes.

So more or less my benefits are worth 60k.

1099 will have to pay the above, but will have the benefit of being able to deduct extra expenses. When i was 100% 1099, i roughly got to deduct about 20k in expenses that i otherwise couldn’t as w2. And i maxed my solo 401k at 60k ish, which is roughly not any different from a contribution perspective given my 401k match, 401k contribution, and 457 contribution.

 

[GatorCHOMPions]

The W2 is where I do full time Pain so there would be no additional benefits. One extra perk is they said there's usually cost of living increases each year. The 1099 I've been with for well over a year and no increase in site. Downsides to the W2 is it's 20-25 mins further away and sees peds whereas the 1099 is only adults. Similar population and pph.

Seems like it's fairly close compensation wise. When I said I max out solo 401k I mean the 20% of what can be taken out. I work like 30 hours per month so nothing crazy.

 

[EctopicFetus]

It’s not as simple as people make it seem. The 1099 allows for deductions from your taxes which a w2 doesnt. Cell phone, home internet, car perhaps.. a new computer etc etc.. what you can do and are willing to do is a discussion with your cpa/tax person.

That being said its why there is no easy answer.. well that and w2 have a tremendous amount of variation in benefits.

one question i have for the group. While Social security is capped Medicare is not.. i think thats the case as a 1099 as well. You have to cover the 2.9% to infinity and get the ACA extra 0.9% above an income threshold as well.. or am i wrong?

 

[calvnandhobbs68]

It’s not as simple as people make it seem. The 1099 allows for deductions from your taxes which a w2 doesnt. Cell phone, home internet, car perhaps.. a new computer etc etc.. what you can do and are willing to do is a discussion with your cpa/tax person.

That being said its why there is no easy answer.. well that and w2 have a tremendous amount of variation in benefits.

one question i have for the group. While Social security is capped Medicare is not.. i think thats the case as a 1099 as well. You have to cover the 2.9% to infinity and get the ACA extra 0.9% above an income threshold as well.. or am i wrong?

Yes but for right now you also get the pass through deduction which is 20% of QBI so it more than makes up for that. My QBI was like 60K less than my actual income because it's calculated after all your business deductions (which includes solo 401k deduction, health insurance, etc).

Even if you're above pass through deduction thresholds, you can organize yourself as an S corp and still save significantly from a tax perspective.

 

[EctopicFetus]

Yes but for right now you also get the pass through deduction which is 20% of QBI so it more than makes up for that. My QBI was like 60K less than my actual income because it's calculated after all your business deductions (which includes solo 401k deduction, health insurance, etc).

Even if you're above pass through deduction thresholds, you can organize yourself as an S corp and still save significantly from a tax perspective.

Agreed. Many games to be played for sure. It’s tough to sort out. It’s also a potentially dangerous game to play with the IRS. If you are on the up and up then of course no worries. Problem is there is a ton of gray.