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W2 vs 1099 in terms of saving

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  • W2 vs 1099 in terms of saving

    Say you have 2 different job opportunities, one is W2 based and the other is 1099.   Both have same income.  However W2 job covers malpractice, license and CME only. No other benefits like health insurance, no 401k.   The 1099 job would have like $20k of own expenses (health insurance, malpractice, etc), but you could open up solo 401k and can contribute max.    Otherwise, everything is equal.   WHich would be better in terms of saving the max amount for the future?

    I tried working it out with real numbers, ie $300k income, but kept getting lost. I think overall, one would be left with less money to invest with in the 1099 job after all taxes/expenses are paid.  Would the higher taxes (SE) and need to pay for own expenses of the 1099 job negate what you would be able to save in the solo401k?  you could take that amount + whatever you would have put in the solo401k and put into the taxable account you would have with the W2 job. In other words, is 73k in taxable better than 53k in solo401k?

  • #2
    The tax deferral has some value, but not that much. The value is not the taxes saved at contribution, but the difference between the taxes saved at contribution vs. the taxes paid on withdrawal. Let us say that is 10%.

    Now let us say the cost of the independent contractor status vs. W-2 employee is also 10%. That might seem like it is a wash.

    However, the reality is far different. The 10% deferral saving is only on the deferral ($54K) ~= $5K. Whereas the 10% W-2 saving is on the entire income ($300K) ~= $30K.

    Doesn't even look close to me and I am probably overstating the deferral benefit and understating the 1099 costs.

    Deferred retirement plans are great, but don't underestimate the value of taxable investing. Especially, invested in equity index funds early mostly only subject to capital gains and maybe a little bonds in a backdoor Roth each year.


    • #3
      This may help



      • #4
        When I have compared W2 to 1099 income over the years, I always expected the 1099 income to be high enough to make up for the added immediate expenses I would have by not being a W2 employee.  In your example, with the incomes being the same I don't believe the 1099 is worth what you will have to pay in your own malpractice, self-employment tax, and expenses.  You are hoping the access to a deferred retirement plan will make up for those costs.  Because of so many moving parts, I don't think that is knowable.  I would push to get the 1099 income higher in this example to make up for the cost savings to the employer of not having you as a W2 using the W2 offer of why you think you are worth more.  If you don't get the 1099 higher I would take the W2 if everything else non-non-finacial life wise is equal such as where you live, which job you just like better, commute, etc.


        • #5
          As  Dr. Mom alluded to, you almost have to figure this on a case-by-case basis. It is possible to project for the purpose of making a decision, but not as a rule-of-thumb. Malpractice for your specialty and in your state may be quite inexpensive - or the opposite. You may be able to set up a defined benefit plan as a sole proprietor that you wouldn't have access to as an employee. You may be able to write off many expenses as a SP that you would lose as a W2 employee due to the 2% limitations. otoh, there is something to be said for the security of being employed and not having to deal with record-keeping, compliance, those pesky CPAs, and so forth. And FICA taxes will be a bigger % of your income the lower your salary. So, there are both tangible and intangible benefits with either choice but they are different for each person who is contemplating the W2 v. 1099 dilemma.
          My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
          Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


          • #6
            Hello, I'm new to locums and having a problem that surprises me.  I've actually been able to find lots of places interested in hiring me as a locums anesthesiologist directly without going through a locums company.  The problem is that practically ALL of them are terrified of allowing me to be a 1099 and insist that I be hired as a W2.  This seems very strange to me and I don't understand it.  It's frustrating because if I am traveling for the assignment and spending money on housing, it's so much better to take the deductions and is the whole reason I formed my LLC in the first place?  Does anyone else have this experience?


            • #7

              and insist that I be hired as a W2.
              Click to expand...



              • #8
                Helping those who wear the white coat get a fair shake on Wall Street since 2011


                • #9
                  When using the post linked above, just remember to change the social security max to 132,900 for 2019 (from 118,000) in the formula.  I'm considering moving from an employed w2 to a part time per diem 1099/w2 split between 2-3 different employers and used Jim's formula.  I was shocked to learn that due to my employers match plus deferred comp match I'd basically have to make 60-70 grand more as a 1099 to break even with my w2 job. Of course if it was a split between 1099 and w2 it would be a lot less of a difference bc of the w2 employer paying the employer share of the SS/medicare taxes.