1099 vs W-2: What's the Difference?

The age old question, W-2 or 1099, lets break it down. The most important difference between the two is the tax implications. These tax implications change the amount that you pay in deductions, and also what this will mean for you during tax season.

1099

Being on a 1099 usually means you work for yourself or you are being indepedently contracted versus being a direct employee. This means typically throughout the year no deductions will come out of your pay. You may feel like you are getting more during the year, but this often leads to nasty surprises at the end of the year. The saving grace is you are allowed to take deductions on any business related expenses you incurred throughout the year. These deductions can help lower your taxable income. However, deductions alone are not always enough to save from owing taxes. There is a very important number that comes into play, and that is 15.4%. That is the self employment tax rate, and this is automatically deducted when you file your taxes, this is only assessed to your taxable income.

W-2

Being a wage employee means that you work directly for a company and not soley for yourself as a 1099. This means your employer facilitates your tax deductions throughout the year, so at the end of the year your should never owe unless your employer did not enter your deductions correctly. There is still a 15.4%, but it is split between the employer and the employee. So unlike a 1099 where the individual would carry the whole tax burden, a wage worker only pays 7.2%, while the employer shoulders the other 7.2%. This sounds favorable, but unlike a 1099 you typically cannot file deductions unless it is attached to statutory employment,

In nutshell, both have their pros and cons for individuals. But be mindful if you are not a sole proprietor, and you have an LLC there are more options that you have that she be explored with a Financial Advisor. Contact us today to see how we can help!