W2 vs. 1099-MISC

Q: I have the option of having my employer pay me on W2 vs. on 1099-MISC. I would like to know which is better.

A: If you are a W2 employee, there will be tax withheld on each of your paycheck but if you are a 1099 employee, no tax will be withheld. 1099 employees usually pay quarterly estimated tax to avoid the fat check due at the year end.

There are considerations that make 1099 a bit more favorable:

·         You can deduct business use of home, travel, office supplies, equipment, and virtually any other work-related expenses

·         You can create SEP IRAs on the 1099-MISC income that can have significant effects in terms of deductions and retirement account funding

·         Ther options above are not available for W2 employees

 

Q: I am an employer. Which kind of employee is more preferable, W2 or 1099?

A: It is often more preferable to hire freelancers and contractor which are 1099 employees. The major thing is you won’t have to pay for all the benefits to contractors such as health insurance, stock options and so on.

However, if a person falls under these characteristics, then they are not a contractor but must be reported as an W2 employee per state Department of Labor rules:

·         Required to work certain hours

·         Required to work on specific equipment provided by the company

·         Required to work using specific processes

·         Typically is only working for a company & not working for other clients

·         Required to work at a specific location

If you are out of compliance, you are subject to large penalties from unemployment insurance, worker compensation insurance, disability insurance, Federal & state payroll taxes, etc.

From another perspective, employees feel more secured when they are in the salaried position. The benefits you offer can retain your talented employees and minimize the employee turnover.

None of this material is tax, legal, or investment advice and is only conversational material provided for discussion purposes only. We are happy to assist with this at our contact information below or through emailing george@dimovtax.com

George Dimov