You are looking for a new opportunity and find a project that piques your interest. Suddenly, you are asked, “Do you prefer W-2 or 1099?” What are they talking about? Which should you pick? Let’s take a look…
When most people go to work, they are in a long term job. They work for a company as an employee and at the end of the year, they get a ‘W-2 form’ to use when filing their taxes. W-2 employment generally comes with benefits of some sort (insurance, 401k, paid time off, etc.) and the employer will handle your periodic tax and unemployment insurance payments.
People who do ‘project’ work generally have a contract for a set time period and then it ends. At the end of the year, they get a ‘1099 form’ to use for filing taxes. Being a 1099 employee means you have to cover any benefits (including ‘paying yourself’ for time off) and handle tax payments on your own. Since you are essentially ‘your own boss’, you have to provide all of the niceties that an employer would normally provide.
Years ago, when you got your first job, it was pretty much a given that you would work at that company for your entire career and eventually retire from there. You may get promotions and might even become the CEO, but you would still be with the same company. Those days are pretty much gone. Now, if you have five years with a company, you are considered to be an old-timer. Job changes every five or so years used to be seen as undesirable. Now, they are seen as the norm and striving to advance your career.
In today’s world, the only constant throughout your career is you. That essentially makes each of us an ‘independent contractor’. Where we work, how we get paid, what we do, what coverages we have, are all on us and change from job to job. That sharp line between being a ‘W-2 employee’ and a ‘1099 contractor’ has softened. What used to be ‘employee vs contractor’ has turned more into ‘are we providing the benefits or are you?’.
While the line is getting blurred, always go for W-2 when given the choice,. Providing insurance at a reasonable rate and navigating through the tax maze on your own can be painful. You will likely need to hire a good tax accountant to make sure you stay in compliance. Still, don’t throw away that golden opportunity just because it is only offered as a 1099. Just be sure to keep in mind that the per hour rate is VERY different between the two due to the cost of the benefits. Don’t let that magic higher rate go straight to your head. Remember that YOU have to pick up all of those goodies – especially your insurance and time off. (Check out my ‘What Rate?’ blog for more info.)
One other thing to consider… Most states only provide unemployment insurance for ‘employees’. They don’t provide it for ‘contractors’. While the final test usually involves things such as how much independence you had with your job, the quick test is W-2 vs 1099. If you go 1099, you need to be sure to add some ‘cushion’ money into your earnings so that you have your own ‘unemployment fund’ when you roll-off the project.
Either way… Good luck!
