W2 vs. 1099. Help Requested

Oct 21, 2008

  1. eric rose
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    eric rose Expert

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    My company is in the process of changing the compensation agreement. We have always been and will continue to be W2 employees. Under the new plan we will be taking a haircut on the front end, for a better renewal. There will be a significant difference in pay as volume increases. Agents are strongly encouraged to hire support staff, and frankly support is needed to make the new math work. I have done well producing on my own, but significantly increased volume will require assistance.

    My real concern is from a cash flow stand point. As a W2 employee, I receive after tax dollars to pay my employees. I also have to use my after tax dollars to pay employer taxes as well. Between my marginal income tax and the employer taxes, I am giving up almost 50% of my commission in taxes.

    If I were a 1099, at least I would have the untaxed money to pay staff and write off the expense. When I voice my opinion to my colleagues they don't seem to care. They all feel that it is "just easier" to be a W2 employee. I'm having trouble drinking the Kool-Aid. I'm pretty sure a W2 is not entitled to all of the same tax privileges for business expenses.

    Is anybody here a W2 with employees? I can't see the benefit in W2 employment if I can do the same as a 1099. Are there disadvantages to being a 1099 that I am unaware of? Are there advantages to being a W2 that I am selling short? I have no need for company benefits and would probably only miss the 401k match. Any help would be appreciated.

    Thank you,
    Eric Rose
     
  2. Delta76
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    Delta76 Guru

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    Re: w2 vs 1099 help requested

    By going 1099, you would also have to pay the other half of the FICA tax (about 7.5%) that your employer is currently paying. Something to consider.
     
    Delta76, Oct 21, 2008
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  3. Mr. Bill
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    Mr. Bill Guru

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    Re: w2 vs 1099 help requested

    Think about it. W-2 employees are the backbone of the US tax system, as they have pretty much NOTHING to write off other than home mortgage and kids. You have no control over the taxes you end up paying.

    A 1099 person has complete control over the taxes and cash flow he/she wishes (to a certain extent).

    You mention "employees" though, and it appears that now, you think you may be 'at risk' but more likely, the corporation that issues the W-2 is at risk. When you switch over to 1099, your corporation (which is most likely what you will need to set up) is at risk (employee lawsuits et. al.) Don't trust someone who knows taxes to give you advice. You need to talk with an attorney (did I say Pre-Paid Legal? Nope.)

    Best of success!
     
    Mr. Bill, Oct 21, 2008
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  4. eric rose
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    eric rose Expert

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    Re: w2 vs 1099 help requested

    Both are valid points. I hadn't considered the other half of the FICA tax.
    While my employer may be "at risk" for my dealings, I am personally at risk for my employee. My employee will have no official capacity with my employer. It makes even more sense to incorporate I think.

    Are there any 1099s out there that wish they were a W2? If so why?
     
  5. padthaiforlunch
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    padthaiforlunch Guru

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    Re: w2 vs 1099 help requested

    IF you are a w-2 employee and try to write off business expenses, you be limited to writing off the amount above 2% of AGI. This flows onto the schedule A.

    With a 1099, you can write off all the costs associated with having an employee, but you will have to pay the employer side of your employment taxes.

    As for having an employee, you will now be responsible for wokers' comp insurance as well.

    If you elect s-corp taxation, you get to write-off the added expenses of your assistant, and avoid paying employment taxes on a portion of your earnings.


    Find yourself a local tax acccountant (doesn't need to be cpa). The initail consultation should be free, since they wiil make money from setting you up, keeping you compliant and preparing your taxes. Expect to spend ~$800/yr with you keeping your own books.
     
  6. Mr. Bill
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    Mr. Bill Guru

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    Re: w2 vs 1099 help requested

    Generally valid points, however, if you have assets (home, investments, etc.) you need to talk with an attorney first. You have to protect yourself. Once you determine the best method of setting it up, then hire the implementer (tax/bookkeeper person).
     
    Mr. Bill, Oct 22, 2008
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  7. TXINSURANCE
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    Re: w2 vs 1099 help requested

    You need a good CPA or Attorney, of which I am neither.

    That being said - the determination of W2 vs. 1099 is largely out of your hands. If you are have 1099 agents there is a lot you can not legally do such as: use your equipment, set schedules, etc., etc.,

    I know a TON of agents paid 1099 that go to an office or call center every day, which is of course per the IRS highly illegal.

    I have said this before , if paying people to work in your office, your schedule, your terms was legal - Wal Mart would be doing it.

    I am one of the few agencies in my area that pays everyone W2 and I eat my lunch on taxes and benefits.

    My point of the post is the 1099 vs. W2 in most cases is not something you have the luxury of choosing, it is a by product of what you are doing and how you are doing it.
     
  8. Guest
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    Re: w2 vs 1099 help requested

    I think the agents you are talking about here are statutory employees which is perfectly legal.
     
    Guest, Oct 22, 2008
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  9. eric rose
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    eric rose Expert

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    Re: w2 vs 1099 help requested

    My point of the post is the 1099 vs. W2 in most cases is not something you have the luxury of choosing, it is a by product of what you are doing and how you are doing it.[/quote]


    Thank you for your input. I am asking because I have been on the captive/indy fence for some time. This feels to me like a push in the indy direction. I'm having trouble seeing the benefit in being both an employee and employer without the tax benefits. While there may be some difficulty in becoming a W2, a 1099 option is very easy to attain.
     
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