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I've been working as a 1099 employee for about 2.5 years on a side gig for $20/hr and now the company has to switch me to W2 at the same $20/hr rate.

Shouldn't there be about a 20% change between 1099 and W2 for tax purposes? Either my W2 hourly should be much higher than $20 or it means I've been working for $16/hr since I've been on 1099 factoring in taxes?

I asked my manager his response was...

"You have always been 20 per hour as a 1099. It's the same. When you do your taxes at the end of the year you pay the same taxes with 1099. With w2 the taxes are taken out beforehand"

Is his statement correct?

  • 1
    Just to clarify, on the W2 you are being paid $20/hr pre-tax? – Peter M Jul 26 at 17:34
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    Yes, it's pre-tax – 626 Jul 26 at 20:05
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    Should not you have been paid more as a self employed contractor as opposed to an employee? – Neuromancer Jul 26 at 22:59
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    As a w-2 employee will you get benefits such as insurance, vacation, sick leave, or holiday pay? – mhoran_psprep Jul 27 at 12:34
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Prior to this conversion they were paying a flat $20.00 per hour for your services. Now they're paying $20.00 per hour and additionally paying things like workers compensation, health insurance, 401k, payroll taxes, etc. None of these costs come out of your $20.00 per hour pay rate.

The cost to them is greater than the $20.00 per hour they had been paying you up to this point. The end result is that they're paying more for you now than they were previously. You're still getting the same $20.00 per hour.

So, are you being paid fairly? I'd say yes. They left you at the $20.00 per hour rate even though they have additional costs. They could have easily reduced your hourly rate to compensate for those additional costs.

It costs more to W2 someone at $20.00 per hour then it does to 1099 them at $20.00 per hour.

  • 24
    Taxes are not "largely the same". When self employed as a 1099 contractor you pay the employer's half of fica taxes. That is an extra 7.65% tax on your gross income that OP's employer is now paying for him as a W2 employee. By making this change OP has received a not insignificant increase in effective income. It isnt just an increased burden on the company that goes to the government or somewhere else. Most of it is to the employee in one form or another. – Matt Jul 27 at 11:38
  • @Matt Thanks for pointing it out. I was puzzled when he said that companies pay more without any difference for the employer, since it makes sense that all of it (or at least most of it) goes straight to the employee – Ant Jul 27 at 13:17
  • @Matt You're right and I should have been more careful in my wording. I was making the point that the company is now assuming an increased financial burden without reducing the OP's hourly rate to offset that increased burden. I've edited those points out of my answer. – joeqwerty Jul 27 at 19:08
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    This answer could be improved with a clear top line "It's generally expected to pay 1099s a higher base wage than W2s" statement so the OP doesn't get lost in the details. – mxyzplk says reinstate Monica Jul 27 at 22:00
41

There is a difference, but it typically goes the other way. When you are a 1099 you pay both halves of the FICA and Medicare taxes. When you are a W-2 your employer pays half. Additionally, you typically don't get much by way of benefits as a 1099, but you do as a W-2.

Whenever I've looked at doing work under a 1099 agreement, I've asked for 25-30% more than as a W-2. If you kept the same hourly rate, and you are receiving just about any benefits (like, paid vacation, health insurance, etc.) you got yourself a raise.

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    Minor nitpick on an otherwise excellent answer: social security and medicare taxes combined make up FICA tax. "FICA and medicare" doesnt make much sense. – Matt Jul 27 at 11:41
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Lets say that your boss can offer your services to a customer, and that you are a w-2 employee for your bosses company. The rule of thumb is that they have to bill at double your rate to pay for your wages and benefits, plus their overhead expenses and make some reasonable profit. Many people use this same guideline when guesstimating what they should charge as a 1099 contractor.

So if you as a 1099 contractor were charging $20 an hour, then under the same guesstimate your w-2 wages should be $10 an hour or about $20,800 a year. All this assumes that when you go to W-2 they will be covering your vacation, sick and holiday pay. This also assumes that they will be offering to pay for some benefits such as health insurance, life insurance, education. If the W-2 job doesn't offer any benefits then you should expect to make closer to $20 an hour as a W-2 employee to cover those missing benefits.

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Answering just the question itself, the statement is correct. A 1099 results in filing as self-employed and you must pay quarterly taxes on your own. You get the whole $20/hour up front, and then give the government your share. With a W2, the government takes their share automatically out of every paycheck.

Compensation rates in the US are billed as pre-tax, while you make $20/hour gross, you'll only net the $16/hour. So while it seems like you're working for less than advertised, you are still costing the company $20/hour.

W-2s have nothing to do with benefits such as vacations, insurance, etc. You must still be a qualifying employee to receive those benefits.

  • It's not quite their share, but rather, an estimation of their share. The final tally is arrived at when you file your taxes the next year, and there, any additional payments or refunds are handled. – Harper Jul 28 at 18:26

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