Some employers ask “1099 or W-2?” as if they were asking how you take your coffee. If you’re the worker, you may be tempted to say “1099,” figuring you’ll get a bigger check that way. You will in the short run, but you’ll actually owe higher taxes. As an independent contractor, you not only owe income tax, but self-employment tax too. On the first $118,500 of income, that’s a whopping 15.3% rate. Beyond $118,500, the rate drops to 2.9%.
In contrast, if you’re an employee, you pay only one-half the Social Security tax (your half is 7.65%) on wages up to $118,500, plus one-half the Medicare rate (your half is 1.45%) on all wages. See IRS Publication 225. Your employer pays the same. If you have income over $200,000, you’re subject to an additional 0.9% Medicare tax withholding. The additional Medicare tax does not apply to employers.
Apart from tax law, employee status carries a host of nondiscrimination laws, pension and benefits laws and wage and hour protections. They all apply to employees but not to independent contractors. For all of these reasons, employers have big incentives to use independent contractors. Many start ups and tech companies rely on the branding that uniformity can provide, but don’t want all of the costs and liabilities of employees.
The answer in many cases is independent contractors. Done carefully, such arrangements can work fine and be legitimate. However, some employers push the envelope to treat workers as independent contractors who are clearly employees if anyone bothers to look. That’s where the IRS and many other agencies come in.[emphasis added]
Read the full story at Loaded Question: 1099 Or W-2?.