Receiving income as W-2 employee vs. 1099 contractor

Question

My wife and I (both in the United States) file taxes jointly and make about $110,000 annually from our W-2 jobs.

I was offered a side gig that would pay an additional $48,000 per year. The company is letting me decide whether to work as a part-time W-2 employee for that gig, or an independent contractor who receives 1099 box 7 income.

By my calculations, receiving the income on a W-2 would be slightly better from a tax perspective, because we'd be taxed at 22% for the additional income, whereas with 1099 income we'd pay 21% (the business tax rate) plus self-employment payroll taxes of ~7.5 percent.

Is this analysis correct? I am still wrapping my head around the recent tax law changes, and may be missing something.

(The side gig would not offer any benefits regardless of how I take the income, so my only real question to weigh is what is better from a tax perspective.)

Answer 1

For many years W-2 was preferred to 1099 because self-employment tax is 2x what you'd have withheld for social security and medicare if you were an employee getting a W-2. However as of 2018 there is a 20% pass-through income deduction that makes 1099 more attractive in most situations. Yes you'll pay self-employment tax instead of the employer paying half of payroll tax, but 20% of your business income won't be subject to income tax.

You don't have to set up an LLC or anything fancy, as a sole-proprietor your 1099 income will be reported on Schedule C (Profit or Loss from Business). If you incur any valid business expenses you will also be able to deduct those from your business revenue.

Here's an IRS FAQ on the Qualified Business Income Deduction