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Chandra
New Member

I'm in settlement discussions with my former employer, and am wondering which is more advantageous, 1099 or w2?

My claims are both backpay and emotional distress, so both/either could be applicable (the settlement number is lower than both individual claims, so I'm wondering if I can have the settlement terms dictate the classification). 

If so, should I push for one over the other? I'm otherwise a w2 employee. I've read that you can be taxed at 15% for the 1099 in addition to your normal tax bracket (in my case 25%), so a total of 40%. As such, would a W2 be best?

1 Best answer

Accepted Solutions
TaxGuyBill
Level 9

I'm in settlement discussions with my former employer, and am wondering which is more advantageous, 1099 or w2?

The portion of your settlement for lost wages is subject to income tax (25% in your case) and 7.65% for Social Security/Medicare taxes.

The portion of your settlement for emotional distress (assuming the emotional distress is not based on physical injury) is subject to income tax (25%), but not the 7.65% Social Security/Medicare taxes.  Even though it is on a 1099, that is NOT subject to the 15.3% Self Employment tax (it should not be reported in box 7 of the 1099).

In the event the settlement is for unlawful discrimination, the attorney fees may be an 'above the line' deduction (which is good).


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4 Replies
Critter
Level 15

I'm in settlement discussions with my former employer, and am wondering which is more advantageous, 1099 or w2?

You don't have a  decision to make ... the employer will make that choice per the IRS regulations on this matter.
Chandra
New Member

I'm in settlement discussions with my former employer, and am wondering which is more advantageous, 1099 or w2?

Thanks for your response! I understand that, but if they pay for the backpay, it will be classified as w2, if emotional distress, as a 1099....do you know the tax implications for a 1099 Misc for an otherwise w2 employee? Would it equal 40%?
TaxGuyBill
Level 9

I'm in settlement discussions with my former employer, and am wondering which is more advantageous, 1099 or w2?

The portion of your settlement for lost wages is subject to income tax (25% in your case) and 7.65% for Social Security/Medicare taxes.

The portion of your settlement for emotional distress (assuming the emotional distress is not based on physical injury) is subject to income tax (25%), but not the 7.65% Social Security/Medicare taxes.  Even though it is on a 1099, that is NOT subject to the 15.3% Self Employment tax (it should not be reported in box 7 of the 1099).

In the event the settlement is for unlawful discrimination, the attorney fees may be an 'above the line' deduction (which is good).


Chandra
New Member

I'm in settlement discussions with my former employer, and am wondering which is more advantageous, 1099 or w2?

Thank you!!! The settlement will likely be a combination of both, but it's great to know that I won't be subjected to the Self Employment tax
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