Going from W2 to 1099.

My wife just threw me a curve ball I did not see coming. She is almost done with her MBA and has an opportunity to go to another company on a 1099 contract basis. It's a management/advisory role with insane flexibility which she always wanted so she is seriously considering it. In addition, the remuneration increase comes up to somewhere around 60-65%. For illustration purposes let's say she's going from $60k to $100k. After accounting for FICA (12.4% +2.9 %), loss of 401k matching, loss of disability insurance, etc. I am still coming way ahead in the calculations, even factoring in that we would be in a higher tax bracket. She doesn't use any other benefit her current employer offer so that's not a factor either.

It's also worth mentioning that the myth of stability is not an issue either. She's lucky to be a specialist in a field where talent is scarce and employers are just as desperate as those looking for Infosec people.

I've been on W2 my whole life so this is new to me. Risk vs. reward seems good but my question to those who do 1099, any additional pitfalls I should take into consideration?

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Comments

iBrokeIT

Yes, if she is going to be doing this for more than a year I highly recommend that you setup an appointment with a CPA to discus setting up an S corp for tax advantages and potentially some legal protections. There are tax advantages to be had if you structure as an S corp at that income level (after you recoup the setup and CPA fees).

S Corporation vs Sole Proprietorship for 1099 Contractors Video: https://www.youtube.com/watch?v=gzUdlHFbTLk

Beyond that I recommend using something like Quickbooks online to track business related expenses throughout the year, complete your Schedule C for end of year taxes and comes up with your current quarterly estimated taxes that you will have to submit.

paul78

So are you planning to go 1099? Or was this a question for your wife?

I think it all kinda depends and how you want to work and the type of clients you are providing services. When I'm self-employed I have always preferred to use my corp. I generally find using a corp-to-corp relationship simpler from a business perspective. So instead of filing a schedule C - I file a K1. Other expenses that besides taxes that may or may be necessary depending on your situation include worker's comp, general liability insurance, e&o insurance. And then there's benefits like health insurance, disability insurance, etc. And the usual business overhead of sales and marketing, etc. etc.

That said - if the relationship is more of a full-time independent contractor, I suspect it doesn't have to be as complicated

- because there are variations - having a chat with a tax accountant is your best bet.

One thing that some people get confused is how LLC's work - generally speaking - an LLC is a legal structure and from a tax perspective is treated the same as a sole proprietorship or partnership. One of the reasons why chatting with a tax accountant is helpful. And if the reason for incorporating is to have a legal shield - you may also need to chat with an attorney.

Good luck!

cyberguypr

Thanks for the input. This for her. Absolutely agree with getting a CPA involved as this is way beyond my level of financial understanding. I am pretty sure that once I present the importance of keeping track of expenses and all that she will decline the opportunity since she does not have the discipline to do this.

EANx

Don't forget to include time off, 1099 contractors don't get paid when they aren't billing. She'll also have to cover any continuing education expenses on her own as well. The key is that if it's not in the contract, she doesn't get it.

paul78

cyberguypr wrote: »

I am pretty sure that once I present the importance of keeping track of expenses and all that she will decline the opportunity since she does not have the discipline to do this.

Well - it also kinda depends on what type of expenses that she would be incurring. If she is essentially like a full-time employee and this is the only company that she is working for - her expenses may not be a heck of a lot. And if she isn't required to get liability insurance, etc. - expenses may be quite low. Some of the things that she may be able to expense could be items that under other circumstances, you can't deduct anyways. For example - a percentage of the cell phone bill. Also - it's common to have Agreements where business expenses such as travel is expensed back to the employer/client.

PJ_Sneakers

Lots of great advice here. I did the 1099 thing for two years, and I can say that you should definitely hire a financial advisor for this, especially when it comes to taxes. I do regret doing it, I wish I had planning skills and known about S corporations at the time but I was young and dumb.

I also recommend hiring a CPA 152.6%, because I am bad at math.

cyberguypr

As someone who also despises math I am impressed with your precise percentage recommendation for a CPA. LOL!

PJ_Sneakers

cyberguypr wrote: »

As someone who also despises math I am impressed with your precise percentage recommendation for a CPA. LOL!

My bad, that was supposed to be 100%