Employee vs Independent Contractor Tax Differences | W-2 vs 1099

all right so many of you have been asking me this question basically the question is this if i'm given the option to be treated as an employee or an independent contractor how much would i pay in taxes and each situation so this might be a it consultant that is an employee right now and can be an independent contractor this could be a physician this could be a few different people an uber driver even you know employee versus independent contractor okay so in this video that's exactly what i'm doing is comparing the employee verse independent contractor taxes so you can make a decision of like how much more do i need to ask for um because i want to see which is the best tax situation for myself right so let's kind of take a look at this over here and see what i created for you basically the assumptions are this you are an employee right now you make 120 000 all right i know some of you are not making that much but the it feel this is on a range i felt comfortable with saying so 120 000 all right so you are an employee earning this amount of money how much taxes do you pay and then if you go the independent contractor out well what you're gonna pay as a sole proprietor being taxed that way or if you take it a step further and you decide to form an llc be taxed as an s corporation what taxes you're going to pay in this scenario so let me walk you through this a little bit so you can understand what's going on here all right so uh let's just call this person john okay john working for someone else earning a w-2 wage if they if they if john earns 120 000 then john has to pay uh his share of social security tax so 120 000 times 6.2 percent that's how much he has to pay in social security uh in medicare he has to pay 120 times 1.45 equals 17.40 all right so total social security and medicare taxes is uh 9 180 now i put this in my tax software to see you know how much income tax john would have to pay and the number i got is about twenty six thousand dollars the assumption being made here is that john is married and uh his spouse earned sixty thousand dollars right that's it's just a number that i just threw in there okay so that's how we got to this number that married filing jointly tax return spouse earned 60 grand as well uh is john earning 120 so this was the tax liability total tax paid 35 129 now if john decides to go the independent contractor route or his employer says hey we can't afford you as an employee anymore you're now an independent contractor what taxes does john have to pay well if he's going to be taxed as a sole proprietorship he excuse me he now has to pay both sides of this tax so he is now the employer and employee and there are some tax breaks for that scenario so just trust me when i say the math is sixteen thousand nine fifty five so 120 000 um the way you could do the simple math times fifteen point three percent is about how much you would have to pay but because of those additional tax breaks the number is more like seventeen thousand okay so the 120 times 15.3 doesn't exactly add up to this amount i included the tax breaks here how much income tax does john and his spouse have to pay 19 000 and change so the total tax 36132 so if the employer is going to now call you an independent contractor and pay you the same amount of money you're in the hole okay you're paying about a thousand dollars more in taxes in this situation all right now if you sort of wise up or you watch my youtube channel and you learn that hey if you're a sole proprietor you should probably form an llc have that llc tax as an s corporation this is the scenario that might kind of play out your 120 000 okay that's the sum of these two numbers here is probably going to be split it's probably going to split in between um you being an employee and um and earning a reasonable compensation of 50 grand and taking a distribution of 70 000 right the total of these items is 120 000. what taxes do you pay well your s corporation is going to pay its share of um social security and medicare tax so the 50 000 times the 6.2 and times the 1.5 equal these numbers here 3100 and 725 and you as the employee also have to pay your share on the 50 grand so you pay the same amount all right how much tax do you pay uh again this is you and your spouse how much do you pay in income tax well you'll be paying 22 869 dollars in total um income tax okay and so your total tax between both of these numbers um here is thirty thousand five hundred and nineteen dollars now something i'm just gonna quickly say is that um you know under both this option the sole proprietor and as an s corporation you would get some tax deductions right you could probably deduct home office a little bit of your cell phone home internet maybe mileage but you might not be driving around too much in this scenario but those would be some additional deductions that you get so in this kind of scenarios i'm saying after those additional tax deductions that you can get you know maybe a laptop that you purchased and you deduct that that your profit in the business was 120 to keep things even with how much you were earning as an employee somewhere else okay that's kind of just an assumption that i'm making here so how much uh taxes you pay as an s corp 30 0519 so comparing that from an employee to as an s corp you might think to yourself okay this sounds like a great deal i'm i'm gonna save 4 600 in in taxes right well not really because the s corporation has some fees associated with it right you might have to pay a cpa you know around 900 bucks to follow that s corp tax return you might enroll in a payroll provider to help you facilitate paying yourself this fifty thousand dollars because there are payroll reports at the fed and state level that you need to file on a quarterly basis and pay those taxes on a quarterly basis um and you need to you know pay the maintenance cost of your llc i'm just rounding up some of you're going to pay 50 to 100 bucks a year some of you are going to pay 800 a year if you're in california so the you know i just kind of said 250 a year so your total fees are 1 749 so your net tax savings is 2 800 so you still might be thinking okay this is a great deal i'm gonna save roughly three grand in tax but let's look at some considerations here right your reasonable compensation of 50 grand um that might be too low you might have to pay yourself a little bit more than that to stay out of trouble in the eyes of the irs and your employer would be providing some benefits right the employer might be saying um hey i'm going to give you health insurance i'm going to match your 401k contributions you're going to get some pto right you're going to get some other benefits maybe some group life insurance rates or something like that okay um so and another thing to keep in consideration is the taxes that you pay is going to change considerably if the household income starts to approach 325 000 okay so if you're kind of watching this video and you're maybe a physician and you make way more than 120 000 or you're have a specialized field where you earn way more than 120 and your household income is going to be 325 000 the tax that you pay is going to go up dramatically obviously you're making more income tax but another thing that's going to be affected here is the um what what's called the um qualified business income deduction you might hear that referred to as section 199a those better those that additional deduction goes away when you are earning this amount of money all right so something to to kind of consider all right um so what's the conclusion here well if you're making about 120 grand as an employee and you're going to switch to an independent contractor in my opinion you're going to want to ask for a little bit more money i would say you should be asking for at least 25 000 to offset the additional headache of the tax preparation payroll service all that stuff hiring someone to do that for you right maybe if i'm doing that for you i might charge you a few thousand dollars a year to kind of facilitate all your bookkeeping and all that um and um also help offset the medical insurance that you might have to pay um as well as the no 401k match right so i would say you know ask for at least 25 grand more you know maybe you want to ask for more like 40 grand more again every situation is different the idea here is um it's more expensive to operate as a sole proprietor right so ask for more money and i would say at a minimum uh ask for twenty thousand dollars more because you know that's the benefits that you're not getting that you're gonna have to pay for out of pocket it's about what it's gonna equate to now everyone's situation is different here right so don't watch this video and just you know apply this to your scenario should probably get a consult maybe not from me maybe with someone else another trusted advisor kind of go through this math or scenario with you and make sense of it alright so if you learn something in watching this video hey please consider in subscribing maybe like this video share it with ace you know one of your it folks that are wondering about this scenario or someone who's going to go the independent contractor route needs to complete compare the scenario share this video with them so that they can make an educated decision all right for more resources uh more free videos go to my website it's navi miragecpa.com on my website you'll be able to form your llc for free get an s corporation done for free watch all my videos for free give away a bunch of resources there alright with that said thanks for watching and i'll see you in the next video

Channel: Navi Maraj, CPA

Views: 44,983

Keywords: 1099, W2, W-2, Independent Contractor, Employee Taxes, Contractor Taxes, Employee vs. Contractor

Id: EL0ipOWUcTg

Length: 10min 11sec (611 seconds)

Published: Fri Sep 03 2021