Face it. We’ve all been there. Driving to work and wondering what would happen if you took the day off. Fighting the urge to nap at 230pm. Going to the bathroom six times at the end of a slow 8-hour day. Dreading the thought of going back tomorrow morning. So I gotta ask … have you ever thought of ditching the corporate life and becoming your boss?
Freelancer. Contractor. Self-Employed. Consultant. Startup CEO. Whatever you want to call it, the title doesn’t matter, but the freedom behind it does. You can play it safe and get stuck in the rat race of corporate America. Or you can take a risk and own your life.
Before you leap, here are some important topics to consider as a W2 Employee or a 1099 Contractor.
- Flexibility. A 9-to-5 job might be perfect for you. Or, it may drive you crazy. The huge perk of freelancing or starting your own business is that you get to set your own hours, take as many vacation/sick days as you need, and work as much or as little as you want. Remote work and flex time are becoming increasingly common, so you can get this as either a W2 employee or 1099 contractor.
- Stability of Income. A fixed salary may be more appealing than it would be as a contractor, where your income could fluctuate wildly. On the flip side, there’s the potential that you could make far more as a contractor because you have no ceiling to your income and all the profits go directly to you. It’s a toss up between W2 employee or 1099 contractor.
- Unpredictable opportunities: Unless you have clients beating down your door, you will have to sell and market yourself. Sales is the lifeblood for any small business. If you’ve never been a salesperson, it might make sense to take a local class or pick up a book at the library. And if you’ve never been a marketer, it might make sense to start reading blogs, studying social media, and begin networking. If doing that is too much work, then maybe you’re better off as a W2 employee.
- Predictable work: Knowing what you do … and having a manager tell you how you’re doing is one of the blessing of a corporate job. Structure, resources, and routine all come with W2 employment. But if hearing those terms cause you anxiety, then maybe being a 1099 is better.
Now, there are some financial differences between being a W2 employee and a 1099 Contractor.
- Social Security Taxes: The IRS collects 12.4% of income up to $117,000 for social security. As a W2 employee, your company often splits the cost and you each pay 6.2%. But as a freelancer, you’ll be responsible for paying the full 12.4%, up to $14,508.
- Medicare Taxes: The IRS collects 2.9% of income up to $200,000 for Medicare. Again, as a W2 employee, your company often splits the cost and you each pay 1.45%. But as a freelancer, you’re responsible for paying the full 2.9%. The kicker is that Medicare Tax goes up another 0.9% on income more than $200,000. It’s a good problem to have as a contractor but additional expenses nonetheless.
- Health Insurance: The Affordable Care Act (ACA) ensured that everyone has access to health insurance. But what you may not have known is that your employer subsidized your insurance premiums. Being a contractor means you’re paying the full amount for health insurance. And if you’re buying it on healthcare.gov, then you’re paying with post-tax dollars. On the other hand, employer-sponsored health insurance premiums are paid with pre-tax dollars. If you cannot stay on your parents’ or your spouse’s insurance, then consider joining a co-employment arrangement, like a PEO, to benefit from group insurance paid for with pre-tax dollars.
- Retirement Benefits: It’s never too late to be thinking about retirement. There’s actually more options available to self-employed persons than W2 employees. You can set up profit sharing, SIMPLE, SEP, or 401(k) plan for yourself or by joining employer groups. Main difference is that there’s administrative costs associated. Consider speaking with a retirement planner or financial advisor for more information. Or also consider joining a co-employment arrangement, like a PEO.
- Business Insurance: As a W2 employee, you can just come to work and start working. But as a 1099 contractor, you will need business insurance, which will often be a requirement for working with certain companies. There are a lot of types of business insurance and hopefully, you’ll never use it. So it’s best to consult a trusted insurance broker.
- Other Insurance: As a W2 employee, you get PTO, holidays, and disability benefits. But as a 1099 contractor, you get paid when you work. So consider protecting your income with disability insurance, accident or critical illness insurance, and worker’s compensation.
- Business Expenses: As a W2 employee, most expenses for doing your job are covered or provided. But as a 1099 contractor, you have to track business expenses. However, this can be additional source of tax deduction, such as home office, transportation, and travel. It’s best to consult with your accountant to ensure that you’re making proper deductions.
As you can read, there is lots to consider as a W2 employee or 1099 Contractor. However, the most important question is whether you prefer sticking with routine or taking a risk. Do what you have to do OR do what you love to do. Striking out on your own can be liberating and anxiety inducing. If you do decide to make the leap, CMax Advisors can assist you in that transition, with HR support and paid employee benefits for contractors. Feel free to contact our managing director Bryan at email@example.com or via LinkenIn for help!