Switch from W2 Employee to Consultant for Tax Savings

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Switch from W2 Employee to Consultant for Tax Savings

Jon Fletcher
Member since 2021 · 174 posts · 56 votes

Does anyone have experience with asking their employer about switching from a W2 employee to a consultant so that you can take advantage of the Real Estate Professional status? If the employer pays your LLC S-Corp instead of you as an employee, does this open you up to tons of tax savings opportunities? I'm interested in hearing from anyone who has done this, or any of the CPA's out there.

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
4y

REPS is based on hours. If you spend same amount of hours as 1099s vs W2, and if you didn't qualify as REPS as before because if W2 before, you will not qualify with 1099s.  

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    4y

    REPS is based on hours. If you spend same amount of hours as 1099s vs W2, and if you didn't qualify as REPS as before because if W2 before, you will not qualify with 1099s.  

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    4y
    Quote from @Jon Fletcher:

    Does anyone have experience with asking their employer about switching from a W2 employee to a consultant so that you can take advantage of the Real Estate Professional status? If the employer pays your LLC S-Corp instead of you as an employee, does this open you up to tons of tax savings opportunities? I'm interested in hearing from anyone who has done this, or any of the CPA's out there.

    First, as @Ashish Acharya pointed out, merely changing the form of compensation does not cancel the requirement that you spend more hours in real estate than in your other money-making pursuits. Whether those other pursuits are W2 or 1099 does not matter for REPS purposes.

    Second, your employer does not have the freedom to choose how to pay you. There're rules. If you're switching to a contractor relationship, not only the manner of compensation changes, but the relationship itself has to change. Your employer would have to surrender a lot of control over your job in order to switch you to 1099.

    Third, even if you arrange such a switch, it comes with a heavy price tag:

    - you will owe the employer's portion of Soc Security / Medicare taxes, basically an extra 7.5% tax

    - you will not be eligible for the employer benefits like insurance

    - it will be more difficult for you to obtain unemployment benefits when the job ends

    - the most important one: you're extremely likely to fall behind on IRS taxes, because they will no longer be taken out of your paycheck, and you will have to save up yourself and pay the taxes quarterly. Very few people are disciplined enough to do it, resulting in huge IRS problems and even bankruptcies.

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  • Jon Fletcher
    OP
    Member since 2021 · 174 posts · 56 votes
    4y

    @Michael Plaks that is great input. I should have added that my W2 job is real estate development, construction and operations. However, based on the above considerations, it may or may not be worth the tax benefits. 

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    4y
    Quote from @Jon Fletcher:

    @Michael Plaks that is great input. I should have added that my W2 job is real estate development, construction and operations. However, based on the above considerations, it may or may not be worth the tax benefits. 

    Yes, you should have :)  This perfectly illustrates the danger of getting or giving tax advice online from incomplete information and assumptions. 

    If you're self-employed in construction and development (aka 1099), you will probably qualify as REPS just from that. But you truly need to be self-employed, and pretending to be self-employed while actually being an employee can be a problem for both you and especially for your employer.

    As always, for the most accurate advice, it's best to thoroughly discuss your situation with your tax advisor.
    1Reply
  • John Mocker
    Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
    4y

    Jon,

    The other cost to you if you move to Independent contractors status is the Insurance cost.  As an IC you probably would not be covered by the firms professional Liability (Real Estate sales has "Statuatory Employees" so the policy may provide coverage for them but not you).  Add to that, Business Automobile coverage for your vehicle, Workers Compensation coverage for yourself, and General Liability coverage.  All those are considered Business expenses so you should check with your CPA to find the net cost.  

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    4y
    Quote from @John Mocker:

    Workers Compensation coverage for yourself

    This is off-topic here, but could you educate me (us?) on this one? Maybe start a new thread, as I believe the topic will be of interest to many. Thanks.

    0Reply
  • Deanna B.
    Investor · Austin, TX · Member since 2022 · 40 posts · 30 votes
    4y

    It will also be a lot more difficult to qualify for loans if you are a 1099 employee. 

    2Reply
  • Christina Yoon
    Accountant · Hunt Valley, MD · Member since 2016 · 49 posts · 17 votes
    4y

    Employee vs IC can be very risky, mainly for the employer- and these rules vary state to state. But the general concept applies - who has greater control in the relationship? 

    From a tax standpoint, it costs you the employer portion of Fica and medicare - additional 7.65%....but...there are advantages a business owner can take that W2 employees cannot, etc.

    I think your conversation will greatly be shaped  on expectations from your current employer.

    Hope this helps!

    1Reply
  • Jon Fletcher
    OP
    Member since 2021 · 174 posts · 56 votes
    3y

    @Ashish Acharya can you qualify as a Real Estate Professional if your full-time W-2 job is working for a real estate development, investment and construction company of which you are not an owner? This is in addition to my real estate investment and management side-business, and my real estate agent business. 

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    3y
    Quote from @Jon Fletcher:

    @Ashish Acharya can you qualify as a Real Estate Professional if your full-time W-2 job is working for a real estate development, investment and construction company of which you are not an owner? This is in addition to my real estate investment and management side-business, and my real estate agent business. 


     Only if you meet the hours requirement. 

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