what are the pros and cons of receiving W-2 Wages versus 1099 Income

[griffy]

1. From the perspective of the business owner?
2. From the perspective of an employee/independent contractor for the company i.e. (being approved or denied for large loan applications like car or mortgage)

[KochuK]

Hi griffy,

There are rules that determine if a person providing service is an employee (W-2) or independent contractor (1099-NEC or 1099-Misc). In general, the degree of control from an employer - what will be done and how it will be done. Please refer to below IRS link.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

Once determined,

(1) from the business owner's perspective - Independent contractor:  less payroll related administrative work, such as payroll reporting, payroll deposits, an employer does not pay half of the payroll related taxes, benefits and insurance etc. 

(2) from the perspective of employee or independent contractor: W-2 employee - easy tax filing. Independent contractor fills out Schedule C Profit (Loss) from Business, can deduct business expenses and others. Net income is subject to income tax, self employment tax. In general, net business loss can offset other type of income.

The Difference Between a 1099 and a W-2 Tax Form

https://turbotax.intuit.com/tax-tips/irs-tax-forms/the-difference-between-a-1099-and-a-w-2-tax-form/...

Depending what type of loans, finance companies have different requirements.  W-2s are in general more easily verifiable, whereas 1099s and Schedule C have more self-reporting elements, may in turn require more verification.

Hope this helps. Thank you.

[AdamNe]

Hello again @griffy !

I will take your items in reverse order. 

As far as paying employees/contractors who work for your business: 

The first thing to consider is that it is important to be knowledgeable about the relevant federal and state law regarding who must be considered an employee and who must be considered a contractor. Often, it is not so simple as just making the the choice between one or the other. 

The differences tax-wise between the two for your employees and contractors:

Any contractors who are issued 1099 forms by you will be required to file a Schedule C with their income tax return, will be allowed to deduct any work-related expenses, and will be liable for self-employment tax on the resulting net income. Neither you nor the contractor will have pre-paid any payroll taxes, which include federal and state income tax, Social Security, Medicare and sometimes other State taxes. All of those taxes are paid by the contractor based on the net self employment income. As it relates to your specific question, this calculation of net self employment income can sometimes complicate matters when it comes to determining income with regard to loan applications, etc. Self employed people need to very detailed records such as profit and loss statements to be able to substantiate and elaborate on what is seen on their tax returns in these situations. 

As for employees (who are issued W-2 forms), as the employee is paid throughout the year, payroll taxes are withheld by you and paid by you on behalf of the employee. The employer is responsible for 1/2 of the Social Security and Medicare tax of the employee based on the gross taxable wages (sometimes along with State obligations). The employer also is responsible for paying certain amounts for unemployment benefits at the Federal and State level.  The employee is responsible for the other half of Social Security and Medicare as well as withholding income tax and State tax obligations. When it comes time for W-2 employees to provide proof of income for loan applications or other financial measures, the process is simpler compared to that of a contractor. 

From the perspective of the business owner: 

Single member LLC's or sole proprietorships are not permitted to pay the owner as an employee and issue a W-2. All pay to the owner is in the form of owner draw.