ot 1099

[David Schwartz]

Look, 1099 vs. W2 is simply a distinction around how and by whom taxes get withheld from our income. With W2 payroll, taxes are taken right off the top; with 1099s, they’re settled later. If you don’t like keeping organized notes, then 1099’s are closer to having a time-bomb watiing to explode long after you’ve forgotten when you lit the fuse.

People like to think that they’ll end up “saving money” or “keeping more” by going 1099. At the end of the day, the same tax laws apply and the taxes we pay end up being more or less the same. However, you can more easily justify business expenses being made by the Corp than you spend personally and justify later in a Schedule C.

If your income is primarily from ONE SOURCE, then W2 is probably the easiest route to go. If you have multiple sources, then 1099’s can be a lot easier.

But having a Corp can be much simpler still.

A payroll company typically charges $30-$50 per employee per month. Your CPA might bill you a little less. But the benefits of having someone else do it for you is that it saves you a ton of time. If you bill out for, say, $150 per hour, then it’s silly to say either one might “cost too much” because doing it yourself is probably 2x-4x MORE costly  (in time) unless you’re also an accountant. Yes, there’s software that helps; however, not only is that an additional expense, but in the end, you’re going to put more money in your pocket by spending your time doing tasks you’re most skilled at and outsourcing those that can be done by others for much less.

The thing that gets swept under the rug in these discussions is the fact that self-employed people (those with no W2 income) ARE discriminated against by financial institutions. Say you want to get a loan for a new car or home or something expensive: if you cannot produce at least 2 years of previously filed tax returns that show your 1099 income, you’re screwed. IF you can find someone who’ll make you a loan, the intereat rate is likely to be several points higher — the net cost of which is WAY MORE than your payroll costs. And while payroll costs are 100% tax deductible as a business expense, the interest on a personal loan is not. And don’t forget the ridiculous amount of time you’re going to incur just trying to find a lender who’ll even work with you.

When I had that big contract and set up my C-Corp and employed a payroll company, it took me virtually no time to deal with any of it. The client’s funds would be direct-deposited into my Corp bank account on their schedule, and I’d get a paycheck direct-deposited into my personal bank account on my schedule. The excess just sat in the Corp bank account and I’d use my debit card to pay for misc. biz expenses as they arose. When the contract ended, I had enough funds in the Corp account to continue my W2 payroll income for nearly 6 months.

The only issue was that I couldn’t file for unemployment because the State billed-back a portion of it to the company (MY company), and once the account was dry and I needed the UI, there was nothing left to pay the State their portion. (This was not AZ.)

In my mind, there’s a great benefit in being able to adjust my pay checks to meet the MINIMAL income I need to cover my personal costs, be taxed on that lower income rate, and leave the rest sitting in the Corp acct to be used for business needs. I didn’t need to file a Schedule C with my personal taxes because all of the business costs were incurred by the Corp and paid at the Corp’s tax rate. Taking those funds as W2 income to me personally, then deducting whatever at the end of the year, typically costs a lot more! 

There’s a HUGE difference in what you have left after-taxes between getting $100k salary on a W2 basis vs. $48k ($4k/mo) with the rest accumulating in the Corp’s name. And again, it’s far more than what the payroll people charge.

Everything a company spends money on is PRESUMED to be a BUSINESS expense, and it comes RIGHT OFF THE TOP BEFORE any taxes are calculated.

Everything you receive as a W2 employee are PRESUMED to be PERSONAL expenses and TAXES ARE TAKEN OUT FIRST. You can get them back later by detailing your business expenses in a Schedule C. But if you’re not careful, that approach can end up biting you in the ass because if you don’t keep accurate contemporaneous records, it’s 6-18 months LATER that you need to document them on your tax return. With a Corp, the taxes are paid only on the remaining unspent profits that tax period — which is WAY SIMPLER to account for.

In my mind, it all boils down to one thing: how much of my time do I want to waste on routine efforts to save taxes. Having a Corp collect 1099 income and a payroll company pay me a small paycheck on a W2 basis while withholding the necessary taxes and disbursing it as needed requires the least time and hassle of any other option. My time is worth far more than I’m going to “save” by doing any of this crap myself instead of farming it out to a specialist. You can make it so simple that you only need to file a 1040EZ for yourself at the end of the year if you want, instead of a 1040 plus one or more Schedule C’s with all the accompanying paperwork that's required. The Corp doesn’t need ANY of that, just some routine notes to justify expenses if you ever get audited.

First and foremost, I’m a software developer. I get to charge a pretty penny for my skills. I believe I’d be throwing money away by thinking I can “save money” by doing something other specialists would charge far less to do much faster and more intelligently. I do not want to be a “tax expert”! And if I get audited, I don’t want to have to pay someone $200/hr to review my taxes so they can help keep me from getting reamed by the IRS by thinking I’m anywhere close to knowing as much as someone who makes a living reading weekly updates the IRS publishes about how schmucks like me tend to screw up our own taxes! 

To me, taxes are nothing but “background noise” and a distraction from my primary goals. I’ll never be as good dealing with them as someone who spends as much swimming around them as I spend working on software. SIMPLE saves me both time and money, and I believe maximizes my profts in the long-term. I’m not a CPA, I don’t play one on TV, and I sure as heck wouldn’t be arrogant enough to think I'm the best CPA I could hire for my own needs at my current hourly rate. I do know enough about taxes to be motivated around keeping them as simple as possible and trust those who specialize in tax laws to advise me.

-David Schwartz




> On Aug 21, 2022, at 7:40 AM, techlists at phpcoderusa.com wrote:
> 
> 
> Good conversation.  I was an LLC and paid the IRS as an S-Corp.  Because the filings where too much for me I used a payroll company.  Not sure I really saved much because it cost so much for the payroll company and for the CPA.
> 
> After reading what David and Steve had to say I think I may never do any 1099 work again... in the form of freelance programming.  I think Steve has the right idea.
> 
> Both of you gave great feedback.
> 

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