W2 vs 1099?

[Angry Birds]

I know I’ve asked this question before but now I have a specific question. If I am offered two jobs— one W2 and the other 1099 — and if the W2 job is per diem without benefits — then do I consider the two jobs the same if they both pay $250 per hour?
Or are taxes higher with one and not the other? Any other expenses with 1099?

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[DeadCactus]

My understanding is that if both pay the same (accounting for benefits), the 1099 should give you a better take home paycheck because of the better opportunities for deductions.

 

[BoardingDoc]

My understanding is that if both pay the same (accounting for benefits), the 1099 should give you a better take home paycheck because of the better opportunities for deductions.

This is only correct if you are aggressive about your deductions to the point that you significantly exceed the standard deduction. Otherwise, the fact that you need to pay your own employer tax as a 1099 makes the 1099 gig definitively LESS appealing. Some counterpoints include the fact that you can solo 401k it as a 1099 and put the whole nearly 60k away between employee/employer contributions which most people don't get the option to do as a W2. People who do 1099 work full time can chime in here about how easy/hard the deduction deal is.

 

[Groove]

If there are no benefits with the W2 gig (No health insurance? No matching 401K? Very odd....) then I would go with 1099 as you are able to aggressively save tax deferred much faster than you would traditionally be able to as a W2 employee with either SEP or personal 401k...

 

[Mr. Vandemar]

I am full time 1099. I paid substantially less tax than my W2 friends this year, and I didn't have to work too hard to find deductions. The biggest thing I regret is going the S-corp route as it was annoying and expensive to set up, and I don't think it has really done much for me. Oh well. As mentioned above, it is nice being able to save a lot with the solo 401k.

 

[Angry Birds]

If there are no benefits with the W2 gig (No health insurance? No matching 401K? Very odd....) then I would go with 1099 as you are able to aggressively save tax deferred much faster than you would traditionally be able to as a W2 employee with either SEP or personal 401k...

Well, it was originally with benefits but then I negotiated a higher rate without benefits. BUT, I am now being offered another job elsewhere with the same rate as my per diem gig but with 1099 instead of W2, so I am trying to compare apples to apples.

Thank you everyone for the answers above.

 

[Angry Birds]

This will sound really bad but I am inclined to W2 only because it seems easier for me. I did 1099 one year and did such a bad job of preparing for the tax man that I cried when I saw how much I owed to Uncle Sam. Plus, I am terrible at taking deductions, etc. I'm a lemming when it comes to my ER job.

 

[Groove]

This will sound really bad but I am inclined to W2 only because it seems easier for me. I did 1099 one year and did such a bad job of preparing for the tax man that I cried when I saw how much I owed to Uncle Sam. Plus, I am terrible at taking deductions, etc. I'm a lemming when it comes to my ER job.

It's not too hard, just get savvy with the usual deduction categories and then find yourself a nice CPA that's not too dirty, but not too clean either and let's you get away with a few things such as mine who let me write off my 77" OLED t.v. in my "game room" -cough- "secondary office space" as a business expense because I...uh....watch CME on it. I pay the estimated quarterly taxes and as long as I max out my SEP I usually don't even owe the 4th tax payment unless I'm paying a lot of short term capital interest from gains in my brokerage account.

 

[thegenius]

I know I’ve asked this question before but now I have a specific question. If I am offered two jobs— one W2 and the other 1099 — and if the W2 job is per diem without benefits — then do I consider the two jobs the same if they both pay $250 per hour?
Or are taxes higher with one and not the other? Any other expenses with 1099?

There are differences.
1) Payroll tax - payroll tax per the IRS tax code is a formula. Plug in your yearly salary and you pay "x". As a W2 the law says that you pay 1/2 of "x" and your employer pays the other 1/2 of "x". As a 1099 - because you technically have no employer...you are responsible for 100% of "x". This is called self-employment tax.

2) There are some benefits (that I think are state dependent) for W2 and not for 1099. For instance most employers are required to pay into state disability funds and if you become disabled, you can make a claim against it if you are W2. I actually did this once when I broke my back and I got like 15K from CA.

3) There are retirement limits as well. As a W2 you are allowed to put away 18-19K / year in a 401K, and your employer can match that same amount. I don't know the details if you can put away 38K total...but I don't think so. As a 1099, you can open a solo-401K or SEP-IRA (I have a SEP-IRA) and you can put away up to 25% of your 1099 income up to like 61K. THIS IS A HUGE BENEFIT FOR 1099.

4) lots of deductions for costs you can take if you are a 1099 which you can't do as a W2.

Basically if you can make 250/hr as a 1099 or as a W2 with no benefits - I see ZERO POINT taking the W2 job. All other things considered. It's a tad more work for you as a 1099. You have to make quarterly tax payments. But that's easy. You get to save a lot more money as a 1099.

 

[thegenius]

This is only correct if you are aggressive about your deductions to the point that you significantly exceed the standard deduction. Otherwise, the fact that you need to pay your own employer tax as a 1099 makes the 1099 gig definitively LESS appealing. Some counterpoints include the fact that you can solo 401k it as a 1099 and put the whole nearly 60k away between employee/employer contributions which most people don't get the option to do as a W2. People who do 1099 work full time can chime in here about how easy/hard the deduction deal is.

That is true. And it's also true that you get to deduct 1/2 of your self-employment tax on your fed return (so you save some money there), and you get to sock away 61K vs 20K in retirement. This is an above-the-line deduction that results $$$ in your pocket at the end of the year.

So in my book, if you save 60K as 1099....1099 is still better than W2.

 

[thegenius]

I am full time 1099. I paid substantially less tax than my W2 friends this year, and I didn't have to work too hard to find deductions. The biggest thing I regret is going the S-corp route as it was annoying and expensive to set up, and I don't think it has really done much for me. Oh well. As mentioned above, it is nice being able to save a lot with the solo 401k.

Yea I had an S-Corp for a few years and closed it. Just not worth it. 1099 is really quite easy

 

[thegenius]

It's not too hard, just get savvy with the usual deduction categories and then find yourself a nice CPA that's not too dirty, but not too clean either and let's you get away with a few things such as mine who let me write off my 77" OLED t.v. in my "game room" -cough- "secondary office space" as a business expense because I...uh....watch CME on it. I pay the estimated quarterly taxes and as long as I max out my SEP I usually don't even owe the 4th tax payment unless I'm paying a lot of short term capital interest from gains in my brokerage account.

I'm curious what % of your income do you pay in quarterly taxes to IRS and state? It's more out curiosity than anything else.
Every paycheck I get I transfer 30% of it to another bank account that I use solely to pay estimated taxes.

So if I make 120K/quarter, I'll pay 30% of that (e.g. 36K) every quarter. I divided that up to the IRS and state.

Doing this I'm usually over or under pay at year end by no more than 5K...so that's pretty good.

 

[calvnandhobbs68]

I'm curious what % of your income do you pay in quarterly taxes to IRS and state? It's more out curiosity than anything else.
Every paycheck I get I transfer 30% of it to another bank account that I use solely to pay estimated taxes.

So if I make 120K/quarter, I'll pay 30% of that (e.g. 36K) every quarter. I divided that up to the IRS and state.

Doing this I'm usually over or under pay at year end by no more than 5K...so that's pretty good.

This is what I do too...30% is usually a good enough guesstimate between federal and state estimated taxes that it gets you close enough come April 15th.

 

[Groove]

I'm curious what % of your income do you pay in quarterly taxes to IRS and state? It's more out curiosity than anything else.
Every paycheck I get I transfer 30% of it to another bank account that I use solely to pay estimated taxes.

So if I make 120K/quarter, I'll pay 30% of that (e.g. 36K) every quarter. I divided that up to the IRS and state.

Doing this I'm usually over or under pay at year end by no more than 5K...so that's pretty good.

My CPA estimates it at ~30% based on last years income. I made a little more last year compared to the year before (450K 2021 vs 400K 2020) and he estimated it at $33,740/quarter for this year which I just paid the first quarter. If I max out my SEP, I usually don't even owe the 4th payment, so I generally hold onto it until tax season comes around to see if I even owe it and most of the time I don't unless I make more than the year before which I probably won't this year. I typically max out my SEP and then invest an equal amount into my taxed brokerage account, so the caveat is if I have a good year (definitely not 2022 so far) where I'm making a lot of money in the taxed account and trading enough that I qualify for short term capital gains, so sometimes that can be some extra $$$ that I owe.

 

[Angry Birds]

This is all very helpful to me. Let me ask another question: does it cost more for the employer to use 1099 vs W2?

 

[BoardingDoc]

This is all very helpful to me. Let me ask another question: does it cost more for the employer to use 1099 vs W2?

Two identical jobs where you get paid the exact same amount, generate the same amount of money for the employer and neither one pays you any benefits at all? 1099 is cheaper for the employer as they don't have to pay your FICA.

 

[calvnandhobbs68]

This is all very helpful to me. Let me ask another question: does it cost more for the employer to use 1099 vs W2?

Costs way less for employers to do 1099 and they have way fewer obligations to you, that's why they tend to like to do it esp if they don't care about having a lot of control over what you're doing. This is also why there's this big fight over lots of workers in lower income jobs (ex. uber drivers, warehouse staff, delivery guys) being likely misclassified as 1099 instead of W2, cause they end up with all the **** and none of the benefits (self employment tax is relatively negligible at higher incomes, deductions, hugely higher solo 401k limits, etc).

1099: You're technically a contractor, that is someone they're just paying to come in and do a job for them. They basically just cut you a check per hour or percentage or whatever the calculation is, it's like if you hire a plumber to come over to do a job. You have zero job related protections.
W2: You're an employee and you're on "payroll", they have to pay their half of SS/Medicare, you can collect unemployment technically if you're fired and they often have to pay into unemployment insurance for the state, you have some, limited, protections as an employee (ex. someone sexually harasses you at work or something).

From your end, you also have to adhere to many more of the employers rules as W2, ex. as a 1099 they could technically really never make you adhere to their "employee handbook" or whatever, as you are technically not their employee. If there's BS like that in your contract, it would never hold up in court unless they'd be willing to admit you were actually an employee, re-classify you as W2 and pay back-taxes on all your income.

 

[Angry Birds]

1099: You're technically a contractor, that is someone they're just paying to come in and do a job for them. They basically just cut you a check per hour or percentage or whatever the calculation is, it's like if you hire a plumber to come over to do a job. You have zero job related protections.
W2: You're an employee and you're on "payroll", they have to pay their half of SS/Medicare, you can collect unemployment technically if you're fired and they often have to pay into unemployment insurance for the state, you have some, limited, protections as an employee (ex. someone sexually harasses you at work or something).

OK but then isn't this a downside of the 1099: I have to pay the entire SS/Medicare whereas before I was paying half as a W2?
And are there any other expenses like this that I would have to take on as a 1099? (Because I didn't even realize this SS/Medicare thing until you told me here.) Basically, I just want to be damn sure before I ask my employer to switch me to a 1099 from W2.

 

[thegenius]

This is all very helpful to me. Let me ask another question: does it cost more for the employer to use 1099 vs W2?

costs more for the employer to do w2. That's why employers would love to make people 1099.

In fact..there was a major lawsuit that went to the CA supreme court a few years ago. Basically the state of CA was losing billions of dollars in payroll and income tax by designating people at 1099 and not W2. Imagine the amount of reduced work you would have to do as an employer if all you had to do was pay $$ as a 1099. Well employers across the state were abusing that like mad and the case went to court and now it's much more difficult to be a 1099.

FWIW, Lyft and Uber challenged the law and won, they spent about 150M challenging the law. So they can continue to designate their employees at 1099.

 

[thegenius]

OK but then isn't this a downside of the 1099: I have to pay the entire SS/Medicare whereas before I was paying half as a W2?
And are there any other expenses like this that I would have to take on as a 1099? (Because I didn't even realize this SS/Medicare thing until you told me here.) Basically, I just want to be damn sure before I ask my employer to switch me to a 1099 from W2.

if you have any questions about this you can PM me. This is an important issue. As a 1099 this is what I do
- get paid every 2 weeks, and I set aside 30% for estimated taxes
- pay quarterly taxes
- deduct 61K /year for SEP-IRA
- deduct self employment taxes
- deduct health care premiums
- deduct expenses related to my "business" which is about 10K/year. Not that much.

all those deductions, except for the retirement which is 20K...you can't do as a W2.

if you have any more questions just let me know

 

[CliveStaples]

Just for clarification, the reason W2 employees can't deduct self employment taxes is because they don't have them, and the reason they can't deduct health insurance premiums is because they're already deducted pre-tax from their paychecks. The tax "advantage" of being a 1099 is

1) if an Individual 401(k) or SEP-IRA gives you more tax advantaged space to save for retirement (usually, but not always)
2) the business deductions, which depends entirely on your comfort with aggressive tax deductions (home office? mileage? S corp pass through?)

On the flip side, the tax advantage of being a W2 is not having to pay self employment taxes.

 

[turkeyjerky]

OK but then isn't this a downside of the 1099: I have to pay the entire SS/Medicare whereas before I was paying half as a W2?
And are there any other expenses like this that I would have to take on as a 1099? (Because I didn't even realize this SS/Medicare thing until you told me here.) Basically, I just want to be damn sure before I ask my employer to switch me to a 1099 from W2.

One other thing to be aware of if 1099, you don't get workman's comp insurance. So if you get a needle stick at work, and then register for the requisite testing, they might come after you for the (massively inflated) charges.

I don't know what effect this would have on future health insurance or disability benefits if one did happen to contract an illness, or suffer a significant injury, while on the job.

 

[JacobMcCandles]

if you have any questions about this you can PM me. This is an important issue. As a 1099 this is what I do
- get paid every 2 weeks, and I set aside 30% for estimated taxes
- pay quarterly taxes
- deduct 61K /year for SEP-IRA
- deduct self employment taxes
- deduct health care premiums
- deduct expenses related to my "business" which is about 10K/year. Not that much.

all those deductions, except for the retirement which is 20K...you can't do as a W2.

if you have any more questions just let me know

I would lean towards an individual 401k over a SEP-IRA so you leave the backdoor Roth option open.

Self-employed health care premiums are only deductible if you or your spouse aren't eligible to participate in a subsidized employer-sponsored plan. This will likely cover many people who have working spouses.

 

[qwerty89]

I am full time 1099. I paid substantially less tax than my W2 friends this year, and I didn't have to work too hard to find deductions. The biggest thing I regret is going the S-corp route as it was annoying and expensive to set up, and I don't think it has really done much for me. Oh well. As mentioned above, it is nice being able to save a lot with the solo 401k.

Many states have found a way to bypass the SALT deduction limits as an s-corp.

 

[thegenius]

Just for clarification, the reason W2 employees can't deduct self employment taxes is because they don't have them, and the reason they can't deduct health insurance premiums is because they're already deducted pre-tax from their paychecks. The tax "advantage" of being a 1099 is

1) if an Individual 401(k) or SEP-IRA gives you more tax advantaged space to save for retirement (usually, but not always)
2) the business deductions, which depends entirely on your comfort with aggressive tax deductions (home office? mileage? S corp pass through?)

On the flip side, the tax advantage of being a W2 is not having to pay self employment taxes.

What if your W2 employer doesn't offer health insurance? Then you are paying post-tax, correct?

I work per-diem at Kaiser and it's W2, and if that were my only job I still would have to buy health insurance on the private market. AFAIK I would not be able to deduct that

 

[turkeyjerky]

What if your W2 employer doesn't offer health insurance? Then you are paying post-tax, correct?

I work per-diem at Kaiser and it's W2, and if that were my only job I still would have to buy health insurance on the private market. AFAIK I would not be able to deduct that

Are you talking about the theoretical situation where your only job was a prn position w/ Kaiser. In that case, if you worked above a certain number of hours (whatever they designated as benefits eligible) they would actually be obligated to offer you health insurance as well. I was in this position in the past (I stayed on prn w/ my former employer and remained eligible for my benefits for an extra year b/c I had >900 hrs or whatever that year)

 

[coachB]

What if your W2 employer doesn't offer health insurance? Then you are paying post-tax, correct?

I work per-diem at Kaiser and it's W2, and if that were my only job I still would have to buy health insurance on the private market. AFAIK I would not be able to deduct that

As long as you itemize, insurance premiums should pretty much always be deductible. The exact mechanism will vary according to how you are paid.

 

[calvnandhobbs68]

As long as you itemize, insurance premiums should pretty much always be deductible. The exact mechanism will vary according to how you are paid.

You don’t have to itemize for health insurance premiums to be deductible, you can just take the standard deduction along with deducting premiums. I have this exact situation for my taxes (buy my health insurance on the marketplace).

 

[thegenius]

You don’t have to itemize for health insurance premiums to be deductible, you can just take the standard deduction along with deducting premiums. I have this exact situation for my taxes (buy my health insurance on the marketplace).

What line on your 1040 do you deduct health care premiums? You only get to do this if you exceed 7.5% of your AGI, correct?

 

[calvnandhobbs68]

What line on your 1040 do you deduct health care premiums? You only get to do this if you exceed 7.5% of your AGI, correct?

No not if you're self employed but the catch is you cannot qualify for other health insurance (ex. from a spouse or from a W2 job).

Deducting Health Insurance Premiums If You're Self-Employed

Most self-employed taxpayers can deduct health insurance premiums, including age-based premiums for long-term care coverage. Write-offs are available whether or not you itemize, if you meet the requirements.

turbotax.intuit.com

Schedule 1, Part 2, Line 17- "Self employed health insurance deduction"-> Gets added with all the other adjustments, then the total is put on 1040 Line 10 "Adjustments to income". Just pulled up my tax return.

 

[thegenius]

I think you are saying the same thing as I wrote above. There just wasn't enough info in your post two posts ago for me to understand what you were saying.

 

[calvnandhobbs68]

I think you are saying the same thing as I wrote above. There just wasn't enough info in your post two posts ago for me to understand what you were saying.

Got it I missed the part where you were W2. This is why it isn’t worth it to do a W2 position where you don’t get benefits (just push for it to be 1099) or pick up a side 1099 gig that will at least cover those deductible expenses. Remember that self employment tax is based on total income, so if you have a primary W2 position that goes above the $147,000 cutoff for social security, you’ve paid into your social security portion and Medicare is only 2.9-3.8% above that.

 

[thegenius]

Got it I missed the part where you were W2. This is why it isn’t worth it to do a W2 position where you don’t get benefits (just push for it to be 1099) or pick up a side 1099 gig that will at least cover those deductible expenses. Remember that self employment tax is based on total income, so if you have a primary W2 position that goes above the $147,000 cutoff for social security, you’ve paid into your social security portion and Medicare is only 2.9-3.8% above that.

I have both 1099 and W2 and I throw all this stuff into TurboTax, and I have faith (and that could be a mistake) that it gets it right.

I just looked at my return and my SE tax was $18,000 and it was only on my 1099 income, I'm looking at my Schedule SE that lays this all out. It's looks a little complicated though

 

[calvnandhobbs68]

I have both 1099 and W2 and I throw all this stuff into TurboTax, and I have faith (and that could be a mistake) that it gets it right.

I just looked at my return and my SE tax was $18,000 and it was only on my 1099 income, I'm looking at my Schedule SE that lays this all out. It's looks a little complicated though

Right because you're only going to pay SE tax on your SE income but it should phase out above that mark. Look at lines 7-10 of schedule SE and you'll see what I mean. It takes into account W2 income when calculating SS tax. See how line 8a says "total of boxes 3 and 7 on form W2". Then on line 9: "subtract line 8d from line 7".

If you have a 1099 and you make more than you pay in health insurance premiums, they should be fully deductible. Schedule 1 only has to do with income that is not wages and that's where that deduction goes as an adjustment to income.

 

[Old_Mil]

I know I’ve asked this question before but now I have a specific question. If I am offered two jobs— one W2 and the other 1099 — and if the W2 job is per diem without benefits — then do I consider the two jobs the same if they both pay $250 per hour?
Or are taxes higher with one and not the other? Any other expenses with 1099?

If they pay the same take the W2 job.

There aren't that many deductions available to a 1099 working a primary gig.

Historically, the 1099 rate has been higher than the W2 rate because it offered no benefits and you were responsible for both sides of the Medicare and social security tax equation.

With the levels of inflation we are seeing today it is almost impossible to buy benefits on the retail market for the relative small difference in w2 and 1099 rates. To give you an example, my employer in my current non medical job payroll deducts 400 a month for health insurance and I have a 3500 a year deductible. Trying to buy that 3500 a year deductible as an individual on the open market is almost impossible and my monthly premium and annual deductible would probably be 2 or 3 times that.