Landing a new job or project can be difficult enough as it is. With all the time you’ve spent sending out your portfolio, preparing for the project, and negotiating your pay, considering HOW you’ll get paid and understanding the difference between being a W2 or 1099 worker can be another difficult route to navigate. Sometimes, landing a new job can feel like a job in and of itself!
So, if your prospective employer tells you you’ll be considered a 1099 employee, what does that mean? Or if you’re given the option of being a 1099 employee or a W2 employee, which should you choose and why?
Let’s break it down piece by piece so you can decide which option is best for you and your career goals.
1099 vs W2: What are the Pros? What are the Cons?
First up, let’s go through what it means to be a W2 employee, which is probably the category most employees fall under.
Here are some things a W2 employee can expect:
- Your employer will withhold federal and state (where applicable) income taxes and your portion of social security and Medicare taxes from each paycheck.
- Part of your social security and Medicare taxes will be covered by your employer.
- Your employer will pay some or all of your unemployment taxes, depending on which state you live in.
- If your employer has more than 50 employees, medical benefits (at least health insurance) could be offered.
- Workers compensation insurance is covered by your employer. So, if you’re injured on the job, your employer will cover all expenses and missed wages related to that injury.
- If you’re an hourly employee, you can receive overtime pay, and your employer will have to pay you at least the minimum wage rate for your state.
- Your employer can offer a 401K retirement plan, and some will also offer some sort of a match. That’s free money in your retirement plan!
- Other benefits like vacation time (also known as PTO—paid time off) and sick days can be offered. If you’re on salary, you will be paid for both vacation days and sick days.
- Your employer has a certain degree of control over your work.
- Your employer can approve/reject vacation time requests.
- W2 employees are usually hired for an undetermined amount of time, and they work according to their employer’s/company’s schedule and needs.
- Your employer can fire you for poor performance or lay you off when necessary.
- You cannot deduct any work-related expenses on your tax return (this will be clarified in a bit). However, your employer can reimburse you for some work-related expenses (like required travel and education, for example) based on their policies.
Of course there are benefits to being a W2 employee, and weighing those pros/cons will be the ultimate deciding factor (scroll down for more info on how to do that).
What does it mean to be a 1099 independent contractor?
1099 employees are often referred to as “Independent Contractors,” so they’re technically considered to be self-employed and not actual employees in the usual sense of the word. So, what does this mean, and what can you expect as an independent contractor? And again, this list is long too:
You will be responsible for making sure you’re regularly setting aside federal and state tax amounts (which will be based on your net income each year), and you will more than likely be responsible for filing federal quarterly estimated taxes. If you do not do this, you can be penalized at tax time. Which can be very painful.
- You will be responsible for all social security and Medicare taxes (lumped together as self-employment taxes), although you can receive a credit for part of these taxes when you file your taxes each year.
- Until the recent coronavirus-related stimulus packages, independent contractors were not eligible for unemployment benefits.
- Independent contractors are responsible for acquiring their own health insurance and medical-related benefits.
- Since you won’t be eligible for an employer-sponsored retirement account (like a 401K), you’ll be responsible for your own retirement accounts. However, you can still receive tax benefits from having a Simplified Employee Pension IRA (SEP IRA) and other non-employee-related accounts.
- You’ll be responsible for your own worker’s compensation insurance if you decide you need that type of insurance.
- You won’t receive overtime pay.
- You and your client (employer) will come to terms on how much you will be compensated (per project or hourly).
- This is an important thing to think about if you go the 1099 route: Take into account all of the above expenses you’ll be responsible for when deciding your fees, as they can take a big bite out of your expected net income.
- You won’t have set—and paid—vacation or sick days. As your own boss, you get to decide about vacation days, and then work out any planned absences with your client.
- Your client doesn’t have the same type of control over your work as in a traditional employee/employer relationship. You truly are your own boss to an extent.
- Independent contractors can be contracted for a certain period of time, and their contract can be terminated at any time according to the terms in the contract.This one is huge: You CAN deduct any business-related expenses on your tax return. Things like cell phone purchases, and cell phone and internet costs, vehicle costs if you travel for your business, computers, office equipment, office supplies, legal feels, liability insurance, licensing fees, technology costs, continuing education costs, office space, and many others. Be sure and consult with a tax accountant to make sure you’re taking advantage of all of your potential deductions.
Which is the Better Option Overall: Independent Contractor vs Employee Pros + Cons
So, with all of the above information, which is better? 1099 or W2? The answer to these questions can be different for each individual. To navigate this list it’s important to ask yourself what are your overall career goals and personal preferences. Then, turn each bullet point into a question with a yes/no response. For example:
- This point: You will be responsible for making sure you’re regularly setting aside federal and state tax amounts (which will be based on your net income each year), and you will more than likely be responsible for filing federal quarterly estimated taxes. If you do not do this, you can be penalized at tax time. Which can be very painful.
- Becomes this question: Do you feel comfortable setting aside federal and state tax amounts OR would you rather that be the responsibility of your employer?
- This point: Independent contractors are responsible for acquiring their own health insurance and medical-related benefits.
- Becomes this question: Do you want to be responsible for acquiring your own health insurance?
- This point: Independent contractors can be contracted for a certain period of time, and their contract can be terminated at any time according to the terms in the contract.
- Becomes this question: Are you comfortable knowing that your contract work only existing within a certain period of time and can be terminated?
While you’re going through this list, be sure to take everything into consideration as much as you can before deciding which route is best for you. Remember that each bullet point may not have equal weight in terms of what fits your lifestyle and career choices. Maybe writing off your expenses is important, but having paid time off is more important and vice versa.
And if you have any questions or concerns, a tax accountant can become your best friend and save you not only money but a lot of stress during the year and when tax time hits. Good luck, congrats on your new project, and drop any questions in the comments below!