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1099 vs w4 (w2)

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by silvergreen 1 view

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I am noticing that more agencies are giving you a choice between working 1099 or w4. Some will begin negotiating a 1099 arrangement inicially. Does anyone know what is driving this?

I have always liked W2 arrangements because of the tax breaks involved. Should I consider working corp to corp in the future if I continue contracting?

7 replies

by hendry_betts

C3P0,

You really aren't receiving any tax breaks from the gov't when you are a Full Time Employee (FTE) drawing a salaried/hourly wage from an employer (W2). The government is holding your tax dollars and giving some of it back to you at then end of the year. Additionally, the company is obligated to pay taxes to the gov't on the monies they pay you. So, that money you pay to FICA is matched by the company, (I believe it is the same for all taxes -- I am sure someone will correct me if I am wrong).

Companies like 1099 arrangements because all they pay you is what you negotiate. They do not file your taxes. They do not care if you pay them. It is not their business. They also do not have to offer you benefits of any type. This is also to their advantage fiscally.

1099 status makes the TCO (Total Cost of Ownership) of an employee much less. Furthermore, a 1099 can be terminated at any time for any reason simply by "ending the relationship." In some states, it is not so easy to terminate an employee without a long, drawn out period or a contractual obligation of additional monies.

If it were me (and right now, I am considering this model) you should contract at a higher rate than you would get if you were an FTE. Take the additional monies and set back the necessary taxes (remember to file quarterly), and control your future.

by silvergreen

Thanks for making clarifications.

So you think that, in our current economical environment, working 1099 gives me more control of my future? How would that work and is it worth the additional costs?

If I make 80k/year on 1099, what percentage goes to the IRS? I was thinking about 50%? On W4, I typically have 25% to 30% taken from my gross income.

On a similar note, do 1099 tax write offs offset the additional tax requirements?

Finally, when negotiating a percentage increase rate on 1099, how much should I increase it? It should be fruitful for both contractor and sub contractor.

by vikkam

In W2 a company is responsible for deducting all taxes. The company also pays about 6.2 % Sos. Sec. (up to $ 90,000) and about 1.45 % towards medicare. This is in addition to vacation, pension, healthcare etc benefits.

If you change to contractual employee, make sure you negotiate with the company to get atleast 7.65 % more which it would have paid to Govt on sos. secu and medicare.

If you are working as independent contractor, and if eligible you can claim transportation costs, home office etc. which reduces you r income. Also you can deduct 100 % of health care premium for you and you r family. You can contribute to Self employed pension plan up to about 25 % of profit from the activity.

Hope this helps.

by nicknielsen

I'd suggest asking for at least 125% of the W-2 rate. As a 1099 employee, you are assuming responsibility for the full 13.5% FICA/Medicare tax and all other tax obligations, including filing quarterly estimated tax payments. You must, of course, also provide your own medical/dental insurance, 401k matching, etc. All of these add up to at least 25% of the base W-2 rate.

1099 status can turn into a financial and tax nightmare if you have never done it before. If you decide to go 1099, please consult an accountant to discuss your options and obligations. You [b]don't[/b] want to get in trouble with the IRS as a 1099 employee.

by vikkam

The companies like 1099 as it reduces their liabilities and overhaeds. Also there are no contractual obligations for indeppendent contractor.

They save 7.65 % in social security and medicare in addition to pension plan, vacation pay etc etc.

by Former member

I believe there could be problems with an inappropriate designation by the company as one being simply deisgnated such a particular status abritratily, or being able to select such designation yourself. I recally reading some time ago the IRS addressing this issue and some fundamental elements of consideration being the level of work to perform as well as degree to which the company controlls the manner and such of the work to be performed. There were other considrations that Ido not exactly recall but the location/existence of the contractor's home office and the like may be included factors.

The end result is that the company and/or the individual could readily run awry of an established IRS rule and therefore suffer notable financial penalties.

by navy moose

I did an eight month stint as a 1099 contractor, When tax time rolled around I repeatedly asked for my 1099 and never received it. Turns out the other contractors never received the 1099s either.

I'm not an accountant and I am a terrible record keeper. I did not keep copies of all the invoices I submitted in order to know how much I had billed. When it came time to enter my income for 2003 I had to guesstimate. I spoke to the local IRS office and asked how to handle this. I was advised to include a letter stating I never recived a 1099 despite repeated requests.

In April 2004 I received a lovely letter from the IRS saying I owed back taxes on over $6,000 in income. Well, the company I worked for was able to fix their shoddy accounting system in time to tell the IRS how much they paid me.

After this, I vowed to never do 1099 work again. The IRS / DOR stuff was far too complex for me to understand. It is far easier to have the company take the tax and FICA out of your check.

Other posts mention deducting transportation and other expenses. I was not able to do this because I am a renter and do not have enough expenses to itemize, especially with the pesky percentages of adjusted gross income calculations.

I also have to recommend hiring a CPA if you decide to become a 1099 worker. I would also recommend setting up a seperate bank account to deposit the amount of money you need to pay to the IRS.

Hope this helps.

Navy Moose

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