W2 vs 1099 Job Offer - Which one is better?

Forum|Forum|2 years ago
June 28, 2023
3 replies
9 views

Two job offers (W2 or 1099) with about the same amount of pay (assume $150k).

Let's say the main difference between the two companies is that the W2 job will not have a 401-K.

Which job offer is better?

Ask the Experts - Energy - June 2023

Best answer by Ruth C-L

Given the amount of income, while I agree that you will avoid 1/2 of the payroll taxes if you elect to take the job as a W-2 employee, there is another approach you can take to filing taxes if you elect to take the job as a 1099 contractor that will end up saving you money in taxes.

You could take the job as a 1099 contractor, create an LLC, and then file Form 2553 to have the LLC files taxes as an S Corp. When you do that, you will need to report some of the 1099 income as W-2 wages paid out from the LLC to you. The amount reported as wages should be reasonable. A good rule of thumb is the 60/40 rule. The 60/40 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Using this formula, they divide their business income into two parts, with 60% designated as salary and 40% paid as shareholder distributions. The 40% will not be subject to any payroll tax at all (15.3% self-employment tax or 7.65% if you're a W-2 employee through the company you have a job with). By electing to take the job as a 1099 contractor but filing the contract income and associated expenses on an S Corp return, you'll end up saving at least $4,590 in taxes ($150,000 x 40% x 7.65%).

Ruth C-L, CPA, Attorney

D

Denisev1220

Level 4

The W-2 job will save you money on taxes. With a 1099, you can deduct expenses but you owe income tax PLUS self-employment tax. For example, on your pay stub, it shows a deduction where you pay social security and medicare taxes. Your employes as to match those amounts out of his pocket. When self-employed (1099), you have to pay both sides. Instead of 7.675% of your income you will pay 15.3% on 93% of your profit. You will need to make quarterly estimated taxes to keep from being penalized. No 401k is not good, if you are a saver, but you can contribute some to a IRA

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer".

R

rschule1

Level 6

Great answer from a previous post. As an add on, the W2 position allows employment tax withholding by individual paycheck, whereas if you don't make quarterly estimated tax payment as an independent contractor, then the tax bill when filing a tax return with self employment tax can come as quite a shock. In a nutshell the W2 position with proper withholding will eliminate unpleasant surprises at the end of the year.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

VolvoGirl

Level 15

But with the 1099NEC income you can deduct all your expenses. Then you only pay income tax and the self employment tax on your Net Profit. Would you have any expenses?

Here is some IRS reading material……

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

VolvoGirl

Level 15

Did you mean the W2 will have a 401K? Because the 1099NEC job won't have one either but you can contribute to a self employed IRA or 401K.

Ruth C-LAnswer

Level 5

Given the amount of income, while I agree that you will avoid 1/2 of the payroll taxes if you elect to take the job as a W-2 employee, there is another approach you can take to filing taxes if you elect to take the job as a 1099 contractor that will end up saving you money in taxes.

You could take the job as a 1099 contractor, create an LLC, and then file Form 2553 to have the LLC files taxes as an S Corp. When you do that, you will need to report some of the 1099 income as W-2 wages paid out from the LLC to you. The amount reported as wages should be reasonable. A good rule of thumb is the 60/40 rule. The 60/40 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Using this formula, they divide their business income into two parts, with 60% designated as salary and 40% paid as shareholder distributions. The 40% will not be subject to any payroll tax at all (15.3% self-employment tax or 7.65% if you're a W-2 employee through the company you have a job with). By electing to take the job as a 1099 contractor but filing the contract income and associated expenses on an S Corp return, you'll end up saving at least $4,590 in taxes ($150,000 x 40% x 7.65%).

Ruth C-L, CPA, Attorney