Bonus check or 1099?

Question

I work for a small sourcing company, salary. I am currently working full-time for their largest client, but have asked for extra hours on smaller clients if possible.

I was granted such and was given the decision to take the extra money, +5 hours a week, as a bonus check or 1099.

Is one method better than the other? (in terms of paying less taxes)

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• I have my own freelance company (founded before I began with the sourcing company) that I could get them to 1099 if that is better than a personal 1099
• Based on the new 2018 tax brackets, I will land in either the single family 22% or 24% bracket

Answer 1

This may not be entirely up to you and your employer. The IRS has rules that classify a job as employment (W-2) or independent contract work (1099) based on facts of how the job is performed and supervised. If you want a particular type of income, you may need to structure the substantive work arrangements accordingly.

That said, the IRS seems mainly concerned about employers misclassifying employees as independent contractors rather than vice versa. Given that your employer is volunteering to pay you on a W-2 and pay half of your payroll taxes, I don't know if the IRS would complain that they really shouldn't do so if you were substantively performing the work as an independent contractor.

EDIT: Which is better? If the working conditions won't differ in any way that matters to you, and the company is offering the same gross payment to you with either approach (this is a bit surprising), then as A.K. and Hart CO said, the W-2 will result in the employer paying some of the taxes you'd otherwise owe. So the W-2 is likely better for you unless there are further tax considerations.

Answer 2

Is one method better than the other? (in terms of paying less taxes)

Yes, both would contribute to your income and tax liability. However, as a bonus check your employer pays through a W-2 and pays half of your FICA and Medicare tax, whereas through a 1099 you pay for all of it. This means you get 7.65% less gross income or about 5.89% less net income [7.65% x (100% - 23%)] receiving through a 1099.

Answer 3

Besides the excellent answer by @AK, the withheld tax on a bonus check can be calculated as if that is a paycheck and you make that much every period. It all depends on how your payroll department configures things. (My ex-wife and I experienced this when getting her Christmas bonuses.)

Of course, things would equalize when you do your taxes.

Answer 4

Nanoman's answer is great, but if both choices are valid then we need to assess which is better from a tax perspective.

Starting in tax year 2018 there is a 20% pass-through income deduction that you'd qualify for if you chose 1099. When self-employed you pay self-employment tax (15.3%) which is equivalent to FICA/Medicare, but when employed your employer pays half of those (7.65%). Since 7.65% is less than 80% of 15.3% you're most likely better off with W-2 income if the gross pay is identical.

One other piece that may push you toward choosing 1099 would be if you had expenses to offset your 1099 income that aren't valid deductions against W-2 income, for example if you paid parking/tolls to do this 1099 work or had home office expenses, you could deduct those expenses from your 1099 income, while you can't deduct those from your W-2 income.

If you have little or no expenses associated with this extra income and the gross pay will be identical whichever option you choose, then there is no benefit to choosing 1099.

Here's a pretty solid write-up on the new pass-through deduction.