7

1099 vs. W2 all-inclusive: pros and cons? (self.freelance)

submitted 7 months ago by paulieb13

I recently was contacted by a recruiter for a contract position where I have the choice to be either a 1099 contractor or W2 all-inclusive. My main concern is that after taxes, benefit costs, and additional business expenses I'd be left with little to no increase from my current salary.

A little about myself. I'm the sole provider of benefits, as my wife works part-time to allow her to stay home with our 2 kids. The new salary is approximately 1.5 times what I currently make as a full-time W2 employee. There's about a $10 difference in the two pay rates, with the 1099 being the higher paid option.

I've done some research online, but am still unsure on which option would be best for my family and I. Are there pros and cons to each of these, and if so, what are they? Has anyone been screwed by either option?

• 6 comments
• share

all 6 comments

sorted by: 

best

[–]harshcougar 3 points 7 months ago

It really depends on how well you manage your finances.

I just got done paying my taxes, and it kind of sucks as a 1099 work because we incur an extra tax (self-employment tax) which essentially doubles my personal contribution to Social Security. As a young person, I am pretty much getting screwed.

That said, I pay $1,000 every three months in quarterly taxes, and on tap of that I put 25% of every paycheck into a saving account I can't touch but once a year. The result; even though I owe the government another $3,300, I have all that money, and then some, already saved. But I definitely pay a larger chunk of taxes than my W2 friends.

Another, better option is to get an LLC. checking account, and set yourself a "salary" that you draw from every week or two. This helps prevent the feast-v-famine struggle many freelancers go through. I am setting myself up like this as well.

I wrote all of that to say this; get the W2 all inclusive, especially if it offers healthcare. I am a young, healthy male, so my healthcare costs are rather reasonable; but I imagine someone with a family, and being the solve provider, the cost would be much, much higher.

About the only positive of being a contract worker is...well...there aren't any, except I can tell my bosses to go pound sand, I take whatever days off I want, and freedom.

Can't put a price on freedom.

• permalink

[–]DragonHunter 3 points 7 months ago

I just got done paying my taxes, and it kind of sucks as a 1099 work because we incur an extra tax (self-employment tax) which essentially doubles my personal contribution to Social Security. As a young person, I am pretty much getting screwed.

If you are making over $55,000 (or around that) you should incorporate. Sole proprietors pay self employment tax (which is both sides of the payroll tax) which is higher than what you pay on distributions.

As a corporation sub-s, you can pay yourself a meager salary (like half of what you bill), pay payroll tax on that salary, and then take the remainder in distributions, which is taxed at a lower rate.

Talk to your tax lawyer, of course, because you aren't paying me for advice.

• permalink
• parent

[–]BOBmackey 1 point 7 months ago

This is the best way to go about it. However make sure that you pay yourself enough that if you want to by a big items(car, house, etc.) that you can qualify for loans. Your pay rate can be a sliding scale, most financier only look back 2-3 years.

• permalink
• parent

[–]DragonHunter 1 point 7 months ago

A lender will look at all income, including the distributions, so your income will be directly related to your billable.

• permalink
• parent

[–]harshcougar 1 point 7 months ago

I am a writer so, no, I don't make anywhere near that. heh. Even a NYT bestseller generally doesn't make that kind of money.

That said, I have plenty of experience as a 1099. I've found that, since we cost companies less, we seem to have more staying power. I've survived a few rounds of layoffs, because I don't come with any benefits or rights.

But yeah, with a family, I'd still go with the W2. Dental, eye, and health insurance all included? You never know what kids might need, and paying $400 to have a 1st-year dental student yank a rotten wisdom tooth out of your head with the Jaws of Life sucks. Trust me.

• permalink
• parent

[–]DragonHunter 2 points 7 months ago

If the pay is comparable (the 1099 position rate would cover the benefits offered by the W-2 rate) then it really boils down to a single question. Do you plan to work for anyone else at the same time (like small side projects)?

If not, take the W-2 salaried position. If yes, take the 1099 position.