As an employee, your taxes are minimized by taking a W-2 job. As a W-2 employee, you pay approx. 7.5% to the government for social security and medicare tax combined. However, so does your employer. This means that when you are a 1099 subcontractor, you are now considered the employer and employee. Therefore, you now get to pay the employer’s portion of social security and medicare tax as well – meaning that you now pay approx. 15% self-employment tax instead of the approx. 7.5% tax as an employee.
Another downside we often see for 1099 subcontractors is having the responsibility of estimating and paying your taxes quarterly. As a W-2 employee, your employer withholds your taxes for you. As a 1099 subcontractor, you now have to remember to pay the IRS separately. While this doesn’t mean you pay any more tax than you would otherwise, often subcontractors forget or inaccurately estimate their tax, so they end up with interest and penalties when filing their returns. This is why we recommend having your CPA to give you estimate vouchers each year with your return – and, if you expect a substantial change in income, let your CPA know so he/she can update your vouchers!
Now, there are plenty of reasons to be self-employed and receive 1099s – this article is specifically addressing the issue when all other factors are equal.