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I posted this question anonymously, but I can't add edit or delete, so I decided to repost.

I'm a software developer for a fortune 500 company (in Texas) and I get paid $5,000/mo as a 1099 contractor. At the end of the year I pay income tax on $60,000 of salary. I add some deductions, but I end up paying tax on most of my salary.

So an HR rep from the company suggested I change to W2: I would get paid a $2,500/mo salary, $1,000/mo car allowance, and $1,500/mo per diem. According to him, as a W2, I would pay income tax on $30,000 ($2,500*12 months) even though the total is $60,000. The per diem and allowance is not taxable.

Since W2 was taken off the table, then my question is: as a 1099, can they pay me $2,500/mo salary and everything else in allowance or per diem so that I only pay income tax on $30,000 instead of the full $60,000?

I have no idea how this works since I've always been on 1099, so any help is appreciated.

  • As a 1099 independent contractor you're also on the hook for self-employment tax. – D Stanley Dec 19 '18 at 21:37
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    If you are a software professional in Texas and working roughly full time, you are being severely underpaid. – Ben Voigt Dec 20 '18 at 4:52
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    Frankly, given what you've written I don't see how they can consider you a contractor vs an employee. IMHO they are walking on thin ice with the IRS. – topshot Dec 20 '18 at 14:13
  • See here if you want to merge your current account with your anonymous one: stackoverflow.com/help/merging-accounts – Ganesh Sittampalam Dec 21 '18 at 7:35
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So an HR rep from the company suggested I change to W2: I would get paid a $2,500/mo salary, $1,000/mo car allowance, and $1,500/mo per diem. According to him, as a W2, I would pay income tax on $30,000 ($2,500*12 months) even though the total is $60,000. The per diem and allowance is not taxable.

That would only be true if the company could prove to the IRS that you qualified for those non-taxable allowances. There are guidelines they have to follow to justify those allowances. If you live close to work, they won't be able to justify paying you per diem. Unless you need a car to do your job, that car allowance would also likely be taxable.

If you are a 1099, then if you can justify and document your costs, then you can reduce your taxable income.

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If you are incurring $1,500 per month that you think the company contracting you should expense, presumably you are already capable of deducting those expenses and simply haven't been. The company contracting you already expenses everything it pays you.

A 1099 contractor means you're a business. You are specifically not an employee. There are specific benefits to companies to only have contractors. Some states, generally those with state income taxes and state welfare programs like California, are very pushy with businesses to ensure that employees are employees and contractors are actually not employees.

When many people are making the decision or weighing the pros and cons of W2 versus 1099 it typically only includes the costs related to employer paid tax sharing, typically you'll read about these as "self employment taxes" but it's just the employer portion of things like your social security tax. Social security REALLY costs 12.4% not the 6.2% W2 employees see on their pay stub, because many W2 employees don't realize their employer is paying the other 6.2%.

Apart from these specific tax considerations, full time employees (particularly white collar employees) at fortune 500 companies are generally provided with a number of benefits like paid sick time, paid family leave, minimum wage, hours limitations, overtime, and the various employer benefits like medical, dental, vision, group life and group disability insurance. All of these things have a cost to the employer.

So, to your numbers, you are not receiving $60k per year of salary. 1099 salary doesn't exist. Your business, of which you are the sole proprietor and only employee, receives $60k of revenue. Your business then spends its revenue on relevant expenses to remain in business, one of which is your salary. Your business can deduct expenses related to your pursuit of that business. Your medical insurance, your cell phone, your computer(s), your home office, your home internet connection, your car lease, car maintenance, car insurance, etc are all to some extent expenses your business has incurred. Be mindful that these expenses need to be prorated based on their use by the business. Obviously your home internet connection also serves up netflix which isn't a business expense and you don't only use your car to meet with clients.

Be mindful that a company paying someone $60,000 salary via W2 is spending probably on the order of $90,000 to employ that person. A company paying a contractor $60,000 as a contractor, is spending $60,000.

I am sure if you sit with a local accountant not anything major, even someone at HR block, or even a friend of yours from college who got a degree in finance or accounting, can really change your tax situation.

  • So you're saying that as a 1099 they can't pay me $2,500/mo in salary and $2,500 in car allowance and per diem? They can only pay me $5,000 per month? – Meyers Dec 20 '18 at 0:52
  • I don't think a company can expense the cost for a car used by a non-employee. – quid Dec 20 '18 at 4:37

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