We conservatives are go getter, take-no-prisoners, high achievers. It should be no surprise to anyone that we’re constantly under the gun trying to structure our taxes for the least amount of financial impact on our families. If you are a high income earner, it seems that most companies are offering one of two options. First – you can be a traditional W-2 employee, where the company will pay for a percentage of your benefits and pay half of your social security taxes. Alternatively, you can be a 1099 contractor – which means that you will be responsible for paying 100% of your social security taxes, along with for your benefits.
Advantages of the W-2 status:
As a W-2 employee, your company will handle taking taxes out of your paycheck, paying for your benefits, and splitting the social security tax with you. Typically someone who can’t trust themselves to set aside money for taxes at the year-end is going to make a great W-2 employee. If this is the way you’ve always done things and you’re afraid of taking risks, then staying a W-2 employee might be the right move for you.
Advantages of the 1099 status:
This option is for the risk taker, who is entrepreneurial minded and wants to keep more of the money they make. As a 1099 contractor, the company you are working for will pay your company directly. You’ll probably want to set up your own corporation to receive funds, and so you can take advantage of an array of tax advantages. Suddenly those lunches where you talk about business, and miles you might drive to a client site, etc. are all tax deductible expenses that can be written off against your corporation. You can also take advantage of other advantages of being self-employed like being able to pay yourself partially in dividends from the corporation instead of taking the money as ordinary income. Maybe as the CEO of your own company, you’ll decide that employees like yourself need a 401k with a 500% match? Maybe employees will get a fitness program? How about free daycare for employees? The options are pretty limited.
Sometimes it can be a difficult choice depending on the difference in pay. I had a job offer recently where the pay would have been $60/hr on a W2, or $80/hr on a 1099 deal. You have to do the math and calculate that if you are paying the entire social security tax, along with benefits for you and your family, etc – is it worth it? When you factor in the tax benefits specified above with having your own corporation, most of the time it looks like the 1099 is the most profitable option.
If you decide to go the 1099 route, consider using one of our partners below for processing your paychecks, benefits, 401k, health insurance, etc. I’ve heard that for $49/month you can usually get a pretty decent package where they will withhold taxes for you and handle all of the accounting headaches that come with being “self-employed”. It’s important for all of us to begin planning for 2013 taxes now, because “Taxmageddon” is just around the corner. I’ll be posting another blog soon on the upcoming changes with Taxmageddon, and how we can further prepare for the Obama administration’s new tax increases and plans to “increase revenue”.