The second part of our series discusses determining whether you should be a 1099 employee of your company or a W-2 employee. In this article Nevada State Corporate Network details the pros and cons of each type of payment. Many prefer the W-2 method or the corp-to-corp- method, but this guide will make it easy to determine the best method in for your unique situation.
The Three Options
The three options (W-2, 1099, and Corp-to-Corp) vary in complexity with W-2 being the simplest. You need to weigh the benefits of each approach and pick the one that fits you best.
W-2
If you’re the kind of person that has no assets to protect, hates record keeping, procrastinates until 11:59 pm on April 15th, and would rather take a beating than fill out a government form, you should consider W-2. You may not find the extra protection and savings worth the demands of incorporation.
1099
There are downsides to operating as self-employed individual that will probably lead you to choose one of the other two options, including (1) your tax return is more likely to trigger an audit by the IRS than any of the other options, and (2) you have no liability protection.
Corporation-to-Corporation
In exchange for modest record keeping demands, you receive the maximum in personal protection and tax savings. Incorporation is almost always your best option.
W-2 Employee: Pros
• Easiest and simplest option.
• No bookkeeping needed other than submitting time sheets.
• Some limited benefits may be available.
W-2 Employee: Cons
• Limited ability to defer income if a 401(k) benefit plan is unavailable.
• Deductibility of un-reimbursed business expenses and medical insurance premiums are very limited.
• Getting health insurance coverage if none is provided will be a challenge.
• Any benefit package is likely to be less generous than if you were a regular employee of the client.
Any way to Reduce Your W-2 Taxes? Few, if any.
Your ability to deduct un-reimbursed business expenses is only available on amounts over 2% if your Adjusted Gross Income (AGI). Medical expense deduction, including premiums, is limited to amounts over 7.5% of AGI. (Note: any premiums paid with pre-tax dollars are not eligible for the deduction.) You may be able to defer some income by contributing to a traditional IRA that can help reduce your AGI.
1099 Self-Employed Sole Proprietor
Definition:
A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether used in the business or personally owned. You include the income and expenses of the business on Schedule C of your own tax return.
1099 Pros:
• Easy to get started.
• Easy to discontinue when your contract ends.
• Losses might be used to offset other income (limits apply).
• Small business retirement plans offer the opportunity to defer more current income than traditional IRAs.
• You might be eligible to take the Home Office Deduction.
1099 Cons:
• Unlimited liability for the owner.
• All profit is subject to self-employment tax in addition to the income tax.
• More administration and bookkeeping than W-2 option.
• You must make quarterly estimated tax payments.
Most companies are wary of going 1099 to an individual. The IRS can review your situation after the fact and decide you were really an employee and nab the company for back payroll taxes and massive penalties. Therefore, to limit their exposure, most companies prefer either W-2 or Corp-to-Corp relationships.
All these decisions are important when determining the pathway for your business. We suggest you call the experts at Nevada State Corporate Network to help you make the right decisions for your business. We are experts in corporate structure and will help you become successful. Call our experts at 1-800-324-5013 8am-5pm Monday-Friday.
After you have determined how to pay yourself, please read our next article about setting up your Self-Employed Business.
