Should I Elect to be an Independent Contractor or an Employee?

Question

I have the option of being hired as an employee or independent contractor. I am wondering if any local accountants or CPAs in the DC / DMV area have any advice as to which I should choose. I am going to a direct lending originator with the agencies (Fannie Mae, Freddie Mac, & HUD), mortgage broker for financing all other financing options, and an asset manager / developer for a family office so please consider the nature of those businesses (investments in real estate, etc.) as a factor as I would assume that would have an impact on the decision. Also, not sure if there are any tax implications uniquely pertaining to DC or Maryland regarding the occupations and/or investments in Real Estate. Thanks in advance for your help.

Rick J. · Answer

I hire many w2 contractors, employees and 1099/C2C consultants in my IT business. The industry is different but the underlying tenet of employment should largely be the same.

Big part of your answer depends on what is going to be your 1099 hourly rate vs what will be your w2 hourly cost/salary range?

For example - let's saying your company is paying you $100,000/year in salary, they may offer you $50/hr saying it comes to $100k (50 weeks x 40 hours) but as you can see that's a raw deal because your loaded cost of health, vision, dental benefits are not baked in, neither is your 401k. So typically we take 20% higher on a w2 vs a 1099 ie, if the company pays you $100k salary, you should at minimum ask for $60/hr 1099 or higher.

Next is the liability. On a 1099, a company can refuse to pay you for a job poorly done based on the contract you sign. On a w2, you can do a terrible job and get fired, but you will still get paid for every hour worked because if not that will be a DOL violation.

Lastly the unemployment benefits. Though small, God forbid we face a major recession again your unemp benefits will kick in based on your accrued hours.

Personally I like to be a w2 employee and have my side hustle on a 1099 for my tax write-offs.

Basit Siddiqi · Answer

@J.P. VenturaW-2 Employee - Employer provides you tools and you are normally doing the work under the guidance of the employer.Independent contractor - Employer does not provide you tools and you are paid to perform a task that may not be under the guidance of the employer.There is other distinctions between the two but those are the big ones.With that said - if you have the option of choosing - I would choose independent contractor if you are going to be working from home and you can have the employer provide you additional compensation since you will have to pay self-employment taxes. I choose this option because you can potentially have a home office deduction.

There are other concerns that you may want to factor in(unemployment compensation, health care, etc).

J.P. Ventura · Answer

Thanks. This is very helpful. I'd like to also sit down and go through the options in person with a CPA as well. Any thoughts on one in the DC Area (Maryland is fine too)? Thanks again.

Aaron Lesher · Answer

Hey J.P.,

I'd definitely go the W-2 employee route if your compensation is similar. As Rick mentioned, you would likely have access to employee benefits like healthcare and a retirement savings plan as a traditional employee, whereas being a contractor means you're paying all these expenses out of pocket. While you can deduct your business expenses before calculating your taxable income as a 1099 contractor, your eligible expenses (even home office, etc.) likely aren't enough to offset this difference.

Another big thing to know + consider is that your total tax rate as a self-employed person is going to be higher than as an employee. While the income tax rates are the same (both individual rates), being self-employed means you have to pay twice as much as an employee into Social Security/Medicare, as you pay both the 'employee' and 'employer' portion of the tax. An employee pays 7.65% while self-employed folks pay 15.3% (you can take a tax deduction for the additional amount which offsets it a bit). So your overall tax rate is going to be noticeably higher.

Lastly, you generally have much stronger legal protection as an employee than a contractor, should something go awry in the relationship. Rick mentioned some of these advantages in his response.

Hope that helps!

Aaron Lesher, CPA

Should I Elect to be an Independent Contractor or an Employee?

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