1099 vs W2

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theorist
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1099 vs W2

Post by theorist »

I am thinking of accepting a consulting position in addition to my full time job. I’d be consulting for a single company, and they’re offering an option of either being paid as a W2 employee or a 1099. It is far from clear to me which is better, and whether the fact that I already have a W2 job (which covers benefits and to which I make significant retirement contributions, saturating whatever I’m eligible for) matters. Any advice would be appreciated!
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RickBoglehead
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Re: 1099 vs W2

Post by RickBoglehead »

The company is wrong. You don't have a choice, nor do they. The IRS has rules for classification. Read the info at this link:

https://www.irs.gov/businesses/small-bu ... r-employee
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CommodoreBogle
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Re: 1099 vs W2

Post by CommodoreBogle »

Consulting (1099) offers you more flexibility, but also more responsibility.

You should get more $$, since the company does not have to pay things like: Healthcare, Unemployment taxes, Employer Soc Sec, 401k Match, etc..

Similarly, you would have to pay Federal self employment taxes (incl Employer side of Soc Sec/Medicare), quarterly estimated taxes, etc..
Not difficult, but much more personal effort required.

i would (did) choose the contractor option.
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theorist
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Re: 1099 vs W2

Post by theorist »

Given what I’m doing, it doesn’t surprise me that they can structure the position either way. I’ll have considerable freedom, but they can easily structure it in terms of defined tasks or open ended work, and defined hours or pay per assignment.

Do the taxes for social security and medicare amount to much if I’m already having significant deductions from the paycheck at my full time job?
Also, is the solo 401k useless if I am already maxxing out my allowed contributions in my full time job, since the cap on annual contributions is cumulative across (pre tax) retirement accounts?

It sounds like if I don’t want to get involved in extra hassle, and am happy with getting a bit less net, having it structured as a W2 is best.
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RickBoglehead
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Re: 1099 vs W2

Post by RickBoglehead »

theorist wrote: Tue May 04, 2021 10:05 am Given what I’m doing, it doesn’t surprise me that they can structure the position either way. I’ll have considerable freedom, but they can easily structure it in terms of defined tasks or open ended work, and defined hours or pay per assignment.

Do the taxes for social security and medicare amount to much if I’m already having significant deductions from the paycheck at my full time job?
Also, is the solo 401k useless if I am already maxxing out my allowed contributions in my full time job, since the cap on annual contributions is cumulative across (pre tax) retirement accounts?

It sounds like if I don’t want to get involved in extra hassle, and am happy with getting a bit less net, having it structured as a W2 is best.
Social Security is capped at $142,800. Once you reach that, no more tax is taken out.
Medicare is not capped. 1.45% on everything.

If you have two employers, they have no way to know of the total. So each will take out 6.2% until you reach your cap WITH THEM. In other words, you'll have too much Social Security taken out. This will be refunded when you file your tax return.

If you are self-employed, you are required to pay both the employee's side and the employer's side of payroll taxes.

And, as you note, 401k contributions are capped. $19,500 employee max, $6,500 catch-up if 50 or older, and $58,000 for 2021 including company contributions ($64,500 with catchup). If you're hitting those numbers with one employer, then you can't do anything else in a solo 401k. And that's whether it's pre-tax or Roth.

It's possible that there is zero reason for you to be a contractor assuming a) that they craft your position to comply with IRS rules and b) your primary employer has no problem with you being an employee with this other company.
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HomeStretch
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Re: 1099 vs W2

Post by HomeStretch »

Depending on the type of consulting you are doing, if you are not a W-2 employee consider obtaining professional liability insurance and factor this cost in when setting your rate.

Are there any benefits you would be eligible for as a W-2 employee? For example, participation in a 401k plan that allows a mega backdoor?

If you are self-employed as a consultant, you can make employER contributions to a Solo 401k equal to 20% of your net business earnings minus the employer share of self-employment tax.
tibbitts
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Re: 1099 vs W2

Post by tibbitts »

I don't necessarily agree that you have a choice, but pretending that you do, unless you have some odd case (like needing to set up a solo 401k to eliminate post-tax IRA contributions, or some other incentive for setting up your own business), having had extensive experience with both I wouldn't even think twice before choosing W-2.
nolesrule
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Re: 1099 vs W2

Post by nolesrule »

RickBoglehead wrote: Tue May 04, 2021 10:27 am And, as you note, 401k contributions are capped. $19,500 employee max, $6,500 catch-up if 50 or older, and $58,000 for 2021 including company contributions ($64,500 with catchup). If you're hitting those numbers with one employer, then you can't do anything else in a solo 401k. And that's whether it's pre-tax or Roth.
The $58k cap is per employer, and a self employed person has a different employer than their W-2 job (with the exception of 403b). While maxing out the employEE portion at the W-2 job means they cannot contribute as an employee to the Solo 401k, they can still contribute as an employER based on the maximum allowed by their self employment net.
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theorist
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Re: 1099 vs W2

Post by theorist »

This all sounds pretty involved! Would the right person to consult be a CPA or a tax lawyer? I both want to avoid any legal mistake, and understand the finances as well as possible. (An issue with potential taxation in multiple states also arises here.)
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Re: 1099 vs W2

Post by bloom2708 »

Does Job A allow you to moonlight? Job B may be fine, but Job A might not be so enthused.

With a full time Job A, when do you do Job B? Nights and weekends?

I would verify with Job A and B that it works. Seems like you should be a 1099 employee.
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Katietsu
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Re: 1099 vs W2

Post by Katietsu »

theorist wrote: Tue May 04, 2021 12:18 pm This all sounds pretty involved! Would the right person to consult be a CPA or a tax lawyer? I both want to avoid any legal mistake, and understand the finances as well as possible. (An issue with potential taxation in multiple states also arises here.)
I do not think that it is all that involved. You certainly do not need a tax lawyer based on your statements up to now. Maybe a consultation within a tax person of some type if you feel uncomfortable with your understanding of the issues after posting here. But, I would try to understand it yourself from first then decide.

While several different items have been tossed at you, most are not that hard to understand individually. Some should not even be a consideration in deciding which way to go. For instance, the extra social security withholding if W-2 at both places, are just handled on your income tax return the same way your regular withholding is reconciled. And if your income is over $200k, social security reconciliation is happening as part of your tax return no matter what.

-Will you have any expenses that you will be responsible for associated with the side job? One sometimes significant advantage of being a 1099 contractor is the ability to deduct expenses.
-Would you want to set up a solo 401k and make employEE contributions?
-What is the multiple state issue? Would you be physically traveling to another state? Or is your concern that the business is centered in another state.
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theorist
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Re: 1099 vs W2

Post by theorist »

Thanks for the helpful remarks and questions.

— Job A allows consulting for a fraction of my time (roughly 20-25%), as well as working elsewhere for several months at a time. (Or taking a temporary leave and working elsewhere full time.) It is possible that while I am not on leave, they would prefer me to be a 1099 employee anywhere I am consulting or moonlighting. (They literally do allow moonlighting, but my plan is to keep my commitment to B within the allowed consulting allotment when I am working on A.) When on leave I could be a W2 employee elsewhere for sure.

— there will be some expenses associated with my work on B.

— I would view most of the extra income as for saving, not spending. In that sense, I’d like to set up a solo 401k though I do fully saturate my allowed contributions through my job A 401k plan. So I believe I’d not be able to make employee contributions, but could make employer contributions.

— the multiple state issue is complicated. If I choose to work for B for a few months I will locate where it is. While consulting as per the allowances of job A, I would not locate where it is. So this is a hybrid situation where sometimes I’d be working for another company in another state while located there, and sometimes I’d be consulting for them while located in my home state. Where do the taxes go?
EdNorton
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Re: 1099 vs W2

Post by EdNorton »

Take 50% more as an outside consultant.

:sharebeer
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Topic Author
theorist
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Re: 1099 vs W2

Post by theorist »

Ok, just talked to A’s office that deals with outside consulting, IP, and conflict of interest. They say while not on leave, I should be a 1099 contractor of B. They also say that this does not necessitate doing anything sophisticated like setting up an LLC or corporation, I can just be paid as a 1099 contractor.

I noticed from this site and online sources that there is a 15.3% self employment tax associated with social security and Medicare. Is it right that this gets reconciled away if you’re already paying social security and Medicare taxes at a high level through your W2 employer?

I’d appreciate anyone straightening me out if what I’ve indicated here is wrong in some horrible way that I don’t understand :-).
hachiko
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Re: 1099 vs W2

Post by hachiko »

You'll still have to pay the "employer" portion of social security.

Is company b going to pay you the exact same regardless of whether you're a 1099 or w-2?

Also, don't take tax advice from your current employer.

And, you do not need a tax attorney for this. Maybe consult a tax professional of some kind. There may happen to be a tax professional who is an attorney that you want to work with. But you definitely shouldn't specifically seek someone out who is an attorney.
reimann
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Re: 1099 vs W2

Post by reimann »

I was a 1099 contractor in addition to my regular job.
Don't be overwhelmed by the responses, it's easy and minimal hassle. There are some advantages. For example you can deduct some work expenses from your income. You can also open up the Solo 401K and put in more tax deferred money.
Just make sure the income is appropriate for what you are doing because you will have to pay a little more taxes.
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Bogle7
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Re: 1099 vs W2

Post by Bogle7 »

EdNorton wrote: Tue May 04, 2021 5:32 pmTake 50% more as an outside consultant.
Wrong!
2-3X your W2 wage is the correct 1099 rate.
I have been self-employed since 1996.
I prefer 1099. Have never been W2 since 1996.
Old fart who does three index funds, baby.
Topic Author
theorist
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Re: 1099 vs W2

Post by theorist »

I believe B will pay me the same regardless, and A has strong preference for 1099 for reasons I fully understand.

The rate I get from B is about 3-4x my W2 rate. (Why not work in that mode full time? Maybe eventually, but I enjoy what I do for A, and it isn’t exactly the same.)
Sahara
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Re: 1099 vs W2

Post by Sahara »

theorist wrote: Tue May 04, 2021 5:52 pm Ok, just talked to A’s office that deals with outside consulting, IP, and conflict of interest. They say while not on leave, I should be a 1099 contractor of B. They also say that this does not necessitate doing anything sophisticated like setting up an LLC or corporation, I can just be paid as a 1099 contractor.

I noticed from this site and online sources that there is a 15.3% self employment tax associated with social security and Medicare. Is it right that this gets reconciled away if you’re already paying social security and Medicare taxes at a high level through your W2 employer?

I’d appreciate anyone straightening me out if what I’ve indicated here is wrong in some horrible way that I don’t understand :-).
The route some people with W2 income and 1099 income is as follows

1 Use Excel https://sites.google.com/view/incometaxspreadsheet/home, tax software, or online calculators https://www.mortgagecalculator.org/calc ... ulator.php
2 Estimate the net Self Employment income - as mentioned certain expenses may be deducted. I use the google source to create my own multi year Schedule C for estimating purposes.
2 Input the self employment income in a calculator or tax software to estimate your overall annual income tax liability.
3 Increase withholding on the W2 job to meet the annual liability. This will help with withholding and may avoid estimated quarterly payments. Alternatively, make estimated quarterly payments.
4 The schedule C will generate a schedule SE detailing the Self Employment taxes.

I'm not sure how that all works if you are at the limits for SS and Medicare but this is a general overview of how it might work.
nolesrule
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Re: 1099 vs W2

Post by nolesrule »

Sahara wrote: Wed May 05, 2021 7:26 am
I'm not sure how that all works if you are at the limits for SS and Medicare but this is a general overview of how it might work.
There are no limits to Medicare taxes. For Social Security taxes Schedule SE takes into account SS wages from the W-2 job for adjusting the SS wage cap on SE income.

If the combined W-2 Medicare wages and SE income are > $200k (or $250k MFJ) then there will be a form for Additional Medicare taxes.
Pete3
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Re: 1099 vs W2

Post by Pete3 »

reimann wrote: Tue May 04, 2021 8:17 pm I was a 1099 contractor in addition to my regular job.
Don't be overwhelmed by the responses, it's easy and minimal hassle. There are some advantages. For example you can deduct some work expenses from your income. You can also open up the Solo 401K and put in more tax deferred money.
Just make sure the income is appropriate for what you are doing because you will have to pay a little more taxes.
+1, 1099 is the way to go as a sole prop (no LLC, no Corp). It is easy to fill out schedule C in TurboTax and 1099 gives you the ability to make deductions directly against income (no thresholds like W2)
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theorist
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Re: 1099 vs W2

Post by theorist »

reimann wrote: Tue May 04, 2021 8:17 pm I was a 1099 contractor in addition to my regular job.
Don't be overwhelmed by the responses, it's easy and minimal hassle. There are some advantages. For example you can deduct some work expenses from your income. You can also open up the Solo 401K and put in more tax deferred money.
Just make sure the income is appropriate for what you are doing because you will have to pay a little more taxes.
Thanks for the helpful response!

Do I understand correctly that as a sole proprietor or independent contractor, I can establish a SEP IRA and fund it as an employer with my 1099 income, even if my W2 income (from employment with some company) is being used to fully fund an entirely separate work-place IRA?
Keenobserver
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Re: 1099 vs W2

Post by Keenobserver »

If tou already have a w2 gig, makes no sense to fo another w2 consult gig. 1099.
AB609
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Re: 1099 vs W2

Post by AB609 »

theorist wrote: Wed May 05, 2021 9:39 am
reimann wrote: Tue May 04, 2021 8:17 pm I was a 1099 contractor in addition to my regular job.
Don't be overwhelmed by the responses, it's easy and minimal hassle. There are some advantages. For example you can deduct some work expenses from your income. You can also open up the Solo 401K and put in more tax deferred money.
Just make sure the income is appropriate for what you are doing because you will have to pay a little more taxes.
Thanks for the helpful response!

Do I understand correctly that as a sole proprietor or independent contractor, I can establish a SEP IRA and fund it as an employer with my 1099 income, even if my W2 income (from employment with some company) is being used to fully fund an entirely separate work-place IRA?
Yes. The limits for employer contributions are separate for each plan. The limit for the employee salary deferrals are aggregate for all plans ($19.5K plus catch up if over 50).
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ShaftoesSpreadsheet
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Re: 1099 vs W2

Post by ShaftoesSpreadsheet »

reimann wrote: Tue May 04, 2021 8:17 pm I was a 1099 contractor in addition to my regular job.
Don't be overwhelmed by the responses, it's easy and minimal hassle. There are some advantages. For example you can deduct some work expenses from your income. You can also open up the Solo 401K and put in more tax deferred money.
Just make sure the income is appropriate for what you are doing because you will have to pay a little more taxes.
+1 on all this.

The Solo 401k with a Roth option for employee contributions is a real winner. You could effectively stash up to $19.5k into a Roth each year from the 1099 income. Any 401k contributions on the W2 side also count towards the $19.5k max though. You also can't contribute beyond the amount of profit you make. E.g. if you make $5,000, then the most you could contribute is $5,000.

Being able to write off your laptop, auto miles, travel expenses, other expenses on the schedule C is a nice bonus.

One downside of going 1099 is having to pay estimated taxes and keep your books organized.

One additional step that keeps it cleaner would be to setup an LLC and a bank account just for the business. Then contract with the client through your LLC, not in your own name. For tax purposes a single member LLC is a 'disregarded entity' and schedule C works the same as sole proprietor.
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