W2 vs 1099
W2 vs 1099 For most of us the actual difference between 1099 Independent Contractors and W-2 Employees is clear cut for several reasons.
But there are many of us out there that have never encountered the W2 vs 1099 questions or never even thought to discover and understand their differences. Please refer to my blog on how the IRS views Employee vs Independent Contractor.
W2 vs 1099 Payroll
We will begin with W2 because it is most common, chances are the majority if not all the jobs you’ve had in the past used W2.
When a person is paid on the form W2 vs 1099, the employer will automatically withhold and pay all of the necessary employee income taxes which are required by the IRS. The applicable taxes include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare). In addition, the employer will pay all of the necessary employer taxes. These taxes shall include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax).
In most cases, the employer will provide the equipment and office space you will need. You may be eligible for some or all of the benefits your employer may offer to permanent employees such as medical, life, and disability insurance; pension plans; sick days; paid holidays, etc.
1099 IS NOT PAYROLL – YOU”RE GOING TO PAY ALL THE TAXES ABOVE YOURSELF – Watch out!
Working on a 1099 basis actually means that you are working as a true Independent Contractor under the IRS rules. You work on a 1099 basis when you are self employed such as a sole proprietor or as a corporation. Your clients will report the monies they pay you to the IRS on a 1099 form. Your clients will typically contract with you to work on a specific project. You should have a written contract with each client that will outline the work you will perform, the fees an or cost the client will pay, and how the client will pay you. You will forward invoices to the client according to the contract terms.
Actual W2 vs 1099 independent contractors are responsible for maintaining all business expenses and income and for making quarterly federal and state income tax payments.
Watch out: Before you pay a penny of Income Tax, you’re going to pay out 15.3% of self-employment taxes. Thats going to sting, especially if you’re really an employee and your employer has changed your status to Independent Contractor to shift the burden of FICA & Medicare Taxes to you.