W2 contractor vs 1099 contractor
Sehboo
contractor. If my rates are same in both cases then does it matter?
Will I be able to deduct things on W2 contract just like I would on
1099 contract?
thanks
smit...@aol.com
If you work, and receive a W-2 detailing your wages and taxes
withheld, you are an EMPLOYEE, not an independent contractor. `That
also means that the EMPLOYER shares the FICA cost with you (rather
than you paying the whole thing, as an independent contractor). Being
an employee should also give you more benefits, including unemployment
insurance, medical insurance, and retirement plan participation.
As an independent contractor, your expenses are normally deductible on
Schedule C (if a sole proprietor), and reduce your gross profit
accordingly. As a W2 employee, many of those same expenses would
normally be paid by the employer. Those that are not, have limited
deductibility on your Schedule C, and are subject to a 2% of AGI
qualification.
Paul Thomas, CPA
"Sehboo" <Masoo...@gmail.com> wrote
>I work as 1099 contractor, but my new contract wants me to work as W2
> contractor. If my rates are same in both cases then does it matter?
It would matter to me. They are paying half the SE tax if you are an
employee.
It would seem that your net - after tax implications, would be higher as an
employee than a contractor.
> Will I be able to deduct things on W2 contract
> just like I would on 1099 contract?
Not "just like" because as a W-2 employee your unreimbursed expenses fall to
Schedule A, subject to an AGI floor before you get to deduct anything.
As you are aware, as a self-employed contractor you deduct yoru expenses
directly on Schedule C.
--
Paul A. Thomas, CPA
Athens, Georgia
joeu2004
Technically, you might have no choice in the matter; neither would
your employer. Based on IRS criteria, certain work relationships are
de facto employee or de facto independent contractor relationships.
Arguably, those criteria are subject to interpretation, so there is
some wiggle room. But the company hiring you might have already
determined that your work relationship fits the criteria for an
employee.
In the cases where either arrangement is possible, there is much for
you to consider. First and primary is the fact that you might lose
the contract altogether if you try go to against the company that is
hiring you. Sometimes "resistance is fu-tile".
On the upside, if you are charging the same rate, ostensibly your net
income is higher as an employee because you are only paying half of
the FICA or self-employment tax. Conversely, your employer would be
paying more for your services. It is surprising that your employer
would prefer that himself, which is why I suspect that he has
determined that IRS criteria require that he treat you as an
employee. (On the other hand, the person hiring you might simply be
trying to navigate company policies that enjoin him from hiring
contractors.)
However, there may be downsides, depending on your personal
circumstances.
First, as an employee, you may be limited by your employee
contractor. For example, you might be enjoined from doing other work
at the same; and other work that you can accept in the future, after
you "quit" this employer (i.e. your contract terminates), might be
limited at least for some time (typically 1-3 years).
Second, you might lose the privilege of deducting certain expenses.
For example, as an independent contractor, it is relatively easy to
declare "home office" expenses, either explicitly or implicitly as
self-employment expenses. That is unlikely as an employee. Also, any
employee expenses that you are allowed to deduct are limited by a
percentage of your adjusted gross income; in effect, the deduction is
probably reduced significantly.
Finally, your personal choices might be more limited, depending on the
specifics of an independent contractor that you might enter into. For
example, as an employee, the number of vacation days and when you take
them -- including time off for sickness and family matters -- are at
the discretion of your employer. You might have more flexibility as
an independent contractor -- although arguably not.
That is just the tip of the iceberg.