Need advice on extra income 1099 or employee?

Question

I am taking on a side job I can either contract as a 1099 employee or be paid as a employee. I make a decent income and so does my wife, so what about the tax consequences?

Answer 1

1. An employee will get W2 reporting his wages and taxes withheld for the year.
From your wages social security and medicare taxes are withheld at 7.65%. You normally can't claim expenses associated with the job unless you itemize your deductions. Also your business related (job related) expenses are subject to 2% AGI limit.
If you don't itemize you will get Standard Deduction.

2. 1099 -- you are independent contractor. On your profit (income minus expenses), you will pay social security and medicare taxes at 15.3%. If you have expenses associated with this job, you file Schedule C on which you record your income and expenses.
You can still choose to itemize your other expenses (mortgage interest, medical...) or get Standard deduction.

3. If you have a lot of business related expenses, then may be 1099 is better than W2.

Answer 2

If they are paying the same hourly rate, definitely go for the W-2.

If they are paying you more as a 1099, do the math... if it is more then 25% more with a 1099, then the 1099 is probably the better choice.

But it should not really be a choice you should have to make. The IRS has very clear regs on what makes a person a contractor and subject to a 1099, and what makes them an employee, and subject to a w-2 and withholding.

Since it is a side job, I am assuming it is some kind of consulting work so it is probably a 1099 type job.

Answer 3

It shouldn't be arbitrary--either you are a subcontractor or an employee. But....if your wages (you alone) are $97,500 or more than it really doesn't matter. If your wages are less than that, you'd be better with a W-2.

ADDITIONAL COMMENT: At $97,500 you no longer pay social security tax. If you are an employee the employer pays 1/2 and the employee pays 1/2. If you re self employed you must pay all of your social security tax. So if you exceed the social security base, no social security tax will be due, just other taxes you'd have to pay whether you were W-2 or 1099 (except Medicare which is minimal).

Before making your final decision make sure you would not have to pay for a business/mercantile license for your city/locality, and/or business taxes if you were paid on a 1099. Sometimes this can be hefty because there is a gross receipts tax (before expenses are deducted).

As previously stated, if you have a huge amout of business expenses against the income, a 1099 may work out. Would have to be a substantial amount of expenses. Could even be a loss??

Answer 4

As a 1099 employee you will be responsible for the employer's portion of FICA. As a benefit you will be able to deduct any legitimate expenses you might incur that are not reimbursed.

Answer 5

W-2 is better.
As a 1099 contractor, you pay a total of 15.3% to social security and medicare.
As a W-2 employee, you pay a total of 7.65% to social security and medicare.
Either way, you pay income tax.