We are often asked about the difference between being a W2 employee and a 1099 contractor, so below we are going to look at what each of those are, and why you may choose one over the other. Let’s begin with the definitions.
The IRS definition of a W-2 employee:
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
The IRS definition of a 1099 contractor is:
An individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
Those definitions are very specific about control over work, but what exactly does it mean to the individual choosing between W2 and 1099? The main consideration is whether you would like to manage your own company or have a company such as Bothwell manage your day to day.
As a 1099 you would start your own company, be paid your agreed rate, and be responsible for managing your taxes. This may seem daunting but comes with many tax related perks due to a whole host of expense related deductions. You would also need to setup your own 401k and healthcare plans.
As a W2, your employer would take care of all deductions at source, not only for state and federal taxes, but also for healthcare costs and 401k contributions, as those plans would be run by the employer.
Common questions
Some jobs dictate whether you would become a W2 or a 1099, but at other times, the opportunity to choose is available. In those instances, what should you consider when deciding between W2 and 1099? There are many factors that will help you make your choice, and the list below includes a number of points we talk through when the questions arise:
Experience level – As a younger engineer, the support and structure that comes with being a W2 employee lends itself well to your early years in the industry. Once you have a solid base of experience, and are becoming more of a subject matter expert, meaning you work more independently with clients, the types of roles you start to fill lend themselves more towards a 1099 role.
Stability – Many people enjoy the consistency that comes with being a W2 employee. Unlike being a 1099, you likely won’t have to think much about how you’re going to line up your next project to keep making money, and the expectations placed upon you will remain largely the same. If something goes wrong with a client and a role is no longer required, there is no cause for concern and we will always make sure your next role is lined up, while continuing to pay you during downtime. As a 1099, you work an hour, you get paid an hour so when a role ends, the time between jobs is unpaid. That said, a 1099 typically has that higher level of experience, meaning they are in demand and usually have less downtime between roles, and should have the confidence in their own abilities, enabling them to be placed quickly.
Healthcare – Many people have a spouse who also works and already has a family healthcare plan through their employer, meaning that benefits don’t hold such importance. A 1099 route allows for wages to be maximized in lieu of benefits.
Are you happy to run your own corporation and manage your own taxes? – Being a 1099 involves a lot of effort, and you need to stay on top of all aspects of your business to ensure you are following all applicable rules, regulations, and laws. As a W2, we take care of everything you need, we ensure all appropriate taxes are taken at source and that all benefits are in place to support you.
Variety of work – A common misconception we hear is that being a W2 employee will narrow your work focus. That could not be further from the truth, and our employees will have just as much opportunity for variety in their roles as our 1099s do.
Which choice is right for you?
Choosing between full-time employment or being a 1099 is a matter of personal preference and opportunity. With Bothwell, you will have the ability to choose the structure that works best for your situation, as we realize that everyone is at a different stage in life and has different goals.
Bothwell Engineering Inc. can help you make that choice. We can talk you through the pros and cons and help you get setup, with whichever path you choose. If you are looking for a change, we are ready to help you find your next role. Get in touch with us now to learn more.