Freelancing as a W-2 employee

I've suddenly gotten a bunch of offers for temporary contracts as a W-2, not as a 1099. In the past, companies have given me the option and I always take 1099 since I have business expenses. Now it seems like all people want to hire as is as a W-2. Is this a new thing?

I feel like I'm being scammed as I don't get benefits and now I can't deduct any business expenses. It's the worst of both worlds. Any advice to convince companies to go with a 1099 contract?

  • I'm researching the net for rates to charge when working as an in-house freelancer. This idea of hiring as a W-2 instead of a 1099 seems to be popping up in several places. One commenter said this has become the trend for NYC.

    I'm going to state my rate and that I work as a 1099 contractor. My rate may be negotiable, but the 1099 is not.

  • I've been down this route several times, usually for *full-time, in a client's office* gigs lasting over 6 months (one of these gigs lasted 3 years and they finally hired me as an employee - was there 7 years total and got laid off a year ago). I'm in New Jersey, BTW.

    It's not a new thing, but frequently you can discuss your employee status with the contract firm. They may be forcing you into a W-2 role because of the health insurance laws. It's also a way for them to justify keeping a larger percentage of the rate they charge the client company.

    Just be aware that when you're working under a 1099, they are hiring your *company*, not you, per se, and they may require you to carry stupid amounts of business insurance (liability and workmen's comp).

    There are a lot of reasons these things happen. Big companies that outsource a lot of their non-critical functions to other companies go through phases where they will insist that all contract employees work for a specific contract house and they'll force 1099 people into agreements with contract houses (this happened a couple of times with Avaya).

  • I am curious too, have faced the same recently (more W-2 "freelancing" than 1099). I think too it may have to do with the health insurance laws.

  • What is the advantage of a 1099 over a W2? I worked for 2 1/2 years on a 1099 contract and all it seemed to get me was 60% of my paycheck because of taxes (I worked 4 days a week at their office, so I couldn't deduct part of my rent for a home office). The job has finally ended and I'm on a 3 month W2 from a temp agency (no other benefits, just as the previous job), making a few dollars less an hour but seeing more net. I'm also an actress. We get paid on W2s and are able to deduct business expenses. Maybe since I just do admin & office/facility work, I'm not understanding the 1099 advantage.

  • I just want to second Kathryn's request for more information. So far all my clients have been individuals, but I'd like to know more about the difference in case I get the chance to work for a company.

    Ruth

  • I'm in northern New Jersey and I'm seeing this a great deal, especially when I'm working in the client's office. My biggest issue is that some of my clients are W2 and some 1099. My taxes are becoming slightly more complicated, but still manageable. Yet, just to play it safe, I have an accountant handle filing my taxes.

  • In the late 1980s, contractors sued Microsoft because they were treated as employees without benefits. The IRS held that a contractor is obligated only to deliver the work contracted by the negotiated due date. People who must work specific hours at a specific location using company equipment under the direct company management are employees.

    Today, a staffing firm's client requires the contractor to work on-site for specific hours under direct management as a "W2 employee." This avoids ACA thresholds as well as the IRS definition. It hurts all contractors, as y'all have well noted.

  • One is allowed to have expenses regardless if an Employee or an Independent Contractor. The question becomes where one takes their expenses. If expenses are as an Employee (wages reported on W2), usual and ordinary business expenses are taken on Schedule A. Expenses as an Independent Contractor (income reported on 1099-MISC) are taken on a Schedule C.

    As a tax preparer, I can tell you that this is a frequent topic of discussion with clients.

    The various taxing authorities will tell you that this is not as gray of a matter as we freelancers like to think (or hope) it is. Most of the taxing authorities follow the IRS standards and determinations on when someone can be classified as an Independent Contractor (with income reported on 1099-MISC) and when they must be classified as an Employee (with wages reported on W2).

    Aside: "Wages" is a technical term to the taxing authorities and always implies a W2 employee and never refers to an Independent Contractor. Wages is one type of "income." There are many other types of income, including but not limited to 1099-MISC income. Wages are always income; income is not always wages.

    There is a 20-Factor Test the IRS considers when determining if one is correctly classified. IRS Publication 1779 is the short version of explaining this. https://www.irs.gov/pub/irs-pdf/p1779.pdf

    IRS Tax Topic 762 offers quick information
    https://www.irs.gov/taxtopics/tc762.html

    Other IRS information can be found in Publication 15-A
    https://www.irs.gov/pub/irs-pdf/p15a.pdf

    Once the matter of the status is determined (and it is presumed, correctly), I advise my clients that their rate for work as an Employee should not be the same as their rate (quote) for the same work as an Independent Contractor. Their Independent Contractor rate should be at least 10% more than they would be paid as an Employee. This higher 'cost' to the client company would be offset by them not having to carry Workman's Comp and Unemployment insurance as well as covers the "Employer" share of the Social Security taxes of 7.65% that is now your responsibility as an Independent Contractor (that they do not have to pay).

    Lastly, just because the company could correctly classify you as an Independent Contractor, they are not required to do so. This means if you satisfy the test for Employee, they are required to hire you as such but if you satisfy the test for Independent Contractor, they are not required to hire you as such and can hire you as an Employee. The 1-sheet Independent Contractor http://buttontaxprep.com/Best-Tax-Practices/BTP... may be of some additional help.

    MScott@ButtonTaxPrep.com

  • S Gallagher,

    Thank you for the detailed reply. I appreciate your time and thoroughness! I'm printing it out for reference.

    Ruth

  • These comments are so helpful. It is great to hear what others are coming up against and solutions to these problems (thanks Freelancers’ Union.)
    Personally, my experience is that in larger organizations, 1099-MISC are filled out by one person intermittently (such as an admin) and W-2s are processed by the HR department and accounting. It goes without saying, that it probably ends up being easier to get HR/accounting to take care of this the “right way”, especially if the company has a number of employees/contractors in this situation. This of course, does not necessarily fit the freelancer’s agenda, and the tax guy may end up have some trouble with your business status. Still, it seems like it is the kind of challenge most creative people like to “get into.” Forums such as this, are extremely useful at bringing together the creative and practical input from multiple creative minds addressing similar issues.

  • I'm now a little confused. I've been hired by staffing agencies as a 1099 contractor. I've signed paperwork saying that I'm not an employee and won't collect unemployment, etc. I've worked full-time both on site and remotely for these clients. While I wasn't technically held to their office hours, I was strongly *encouraged* to keep them and was expected to work an 8 hour day. I could take off for doc's appointments and vacations and I didn't earn any leave time but otherwise, I was treated like just another employee. The only restrictions were that if I was working in an office, my badge was only good for certain hours.

    The W-2 contracts I'm getting now are for similar work. All are full-time gigs but limited duration and a mix of remote work and on-site work.

    As for taking expenses, my accountant has said that since I don't own my own house, I get a bigger deduction from the single, head of household than from itemizing business expenses. Hence not being able to deduct when I am hired as a W-2. So I don't quite understand what business expenses I can deduct as a W-2.

  • This comment has been removed with a light and loving touch.

  • Copyright info as well as non-competes and non-disclosures are covered in contracts as well.

  • William, that is NOT TRUE. What happens is typically when you are hired as an employee, you will be required to sign a contract with the company that designates all your work as "work for hire" and therefore all rights belong to the employer. Frequently (in jobs where patents are possible) you will also sign away your patent rights and also agree to help the company obtain patents on work you performed as part of your duties (and in many cases, work that you perform outside of work that pertains to the business of the company).

    You do NOT automatically relinquish your right to intellectual property as part of being an employee. It's all part of your employment contract that you sign as part of the hiring process. That's also where the (frequently) non-enforceable noncompete clauses are stuck.

    I encourage everyone to READ CONTRACTS before signing and strike out clauses that you don't agree with.

  • Just occured to me to check with my acocountant, and she is providing the same info we are sharing here: 1099 contractors are cheaper for businesses because they don't have to pay the employer portion (1/2) of Social Security and Medicare tax. Because of this, the IRS has been cracking down on employers who incorrectly categorize their employees/contractors.

    The plus side for you when it comes to W2s is that 1) you don't have to worry about withholding tax on that income and 2) they are essentially paying 1/2 of your self-employment tax (Social Security & Medicare tax).

    The downside to being a W2 employee is that you can't offset that income with business expenses.

    Here is the IRS's guidelines on who qualifies to be an employee vs. contractor:
    https://www.irs.gov/Businesses/Small-Businesses...

    For anyone who may be interested, she works with creatives specifically, and she also has a small course on "being your own CFO" which is pretty good, I went through it :) She has helpful info on her blog too: http://amynorthardcpa.com/

  • As a tax preparer, I can assure you that one can offset their W2 income with usual and ordinary expenses related to their job or occupation. The ability to take "business expenses" is not limited to 1099-MISC income.

    There are different rules with regards to how those expenses are taken / reported on the tax return. Those differences also cause the net impact to be different when applying those business expenses against W2 income or 1099-MISC income.

    It is simply a false statement that one cannot take their usual and ordinary job expenses against their W2 income.

    With regards to the employer share of Social Security taxes - known as Self-Employment taxes (SE) . . . the total due on the income is 15.3% of the gross. If there is a W2 relationship, the employer is required to pay half of that (7.65%) and the employee has their half withheld as Social Security taxes (FICA + Medicare).

    When there is no employer to pay half, the Independent Contractor is required to pay the entire 15.3% on the profit of their Schedule C.

    This is why I always suggest to my clients that their W2 rate be different than their Independent Contractor rate. Their Independent Contractor rate should be (at least) 10% more than would be their W2 rate.

    Usual and ordinary job expenses are allowed to be taken by anyone regardless if their income is reported on a W2 or a 1099-MISC.

    MScott@ButtonTaxPrep.com

  • After talking with a company about potential gigs, they hire contractors as temporary W-2 employees to give them access to their files. Contractors don't have access to their servers and thus would always need someone to get files and assets for them. I can somewhat understand that, but again, I've worked for other companies as a 1099 contractor and had contractor access. I guess each company is different.

  • If the client company hires contractors directly (and not a third-party temporary staffing company), I can understand this. Their insurance could require that if they are insured against data misuse from employees (and there could be other recourse available if the person is an employee rather than a vendor or an employee of a vendor)

  • The thing about the classification of "W2 Contractor" is that companies using this want to disguise their contractors as employees but do not want to pay contractors as they would employees.

    It has nothing to do with access rights to data on servers; server software doesn't know or care about an individual's employment category. That's a matter of corporate policy alone. A company may claim that their insurance company forces them to do something, but the insurance company probably doesn't care because it is happy to charge more for the same insurance coverage.

    Federal and state law regarding health insurance coverage does play a role in the use of this essentially bogus labor category. Companies want to pay as little as possible, and even less than that, for labor.

    As you probably perceive, I am one who has few, if any, opinions about most anything.

  • No, differentiating between contractors and employees has been going on for a lot longer than the ACA. I've had that issue before. It depends on the company and who they allow access to their corporate website. Some don't care. Others have special contractor access. Some don't allow contractors access at all. It's not about insurance but how companies handle their data. Some of the smallest companies with which I have contracted have the most draconian data policies.

  • The main reason I became a solo practitioner in 2002 was to never step foot into an office ever again!

    In my situation, proofreading at home, a 1099 is really the only practical (and probably legal) thing for me taxwise, however, there is a downside.

    Because I make very little profit each year, I am not paying into Social Security and the only way to INCREASE my retirement benefit (so I am told) is to get a regular part-time job with a W-2. This downfall really sucks, but I am independent, set my own rates, my own hours, and turn down jobs as I see fit; so overall, I am very happy and have no plans to get a part-time job.

  • I'm researching the net for rates to charge when working as an in-house freelancer. This idea of hiring as a W-2 instead of a 1099 seems to be popping up in several places. One commenter said this has become the trend for NYC.

    I'm going to state my rate and that I work as a 1099 contractor. My rate may be negotiable, but the 1099 is not.

View 1 more comments
  • I've been down this route several times, usually for *full-time, in a client's office* gigs lasting over 6 months (one of these gigs lasted 3 years and they finally hired me as an employee - was there 7 years total and got laid off a year ago). I'm in New Jersey, BTW.

    It's not a new thing, but frequently you can discuss your employee status with the contract firm. They may be forcing you into a W-2 role because of the health insurance laws. It's also a way for them to justify keeping a larger percentage of the rate they charge the client company.

    Just be aware that when you're working under a 1099, they are hiring your *company*, not you, per se, and they may require you to carry stupid amounts of business insurance (liability and workmen's comp).

    There are a lot of reasons these things happen. Big companies that outsource a lot of their non-critical functions to other companies go through phases where they will insist that all contract employees work for a specific contract house and they'll force 1099 people into agreements with contract houses (this happened a couple of times with Avaya).

  • I am curious too, have faced the same recently (more W-2 "freelancing" than 1099). I think too it may have to do with the health insurance laws.

  • What is the advantage of a 1099 over a W2? I worked for 2 1/2 years on a 1099 contract and all it seemed to get me was 60% of my paycheck because of taxes (I worked 4 days a week at their office, so I couldn't deduct part of my rent for a home office). The job has finally ended and I'm on a 3 month W2 from a temp agency (no other benefits, just as the previous job), making a few dollars less an hour but seeing more net. I'm also an actress. We get paid on W2s and are able to deduct business expenses. Maybe since I just do admin & office/facility work, I'm not understanding the 1099 advantage.

  • I just want to second Kathryn's request for more information. So far all my clients have been individuals, but I'd like to know more about the difference in case I get the chance to work for a company.

    Ruth

  • I'm in northern New Jersey and I'm seeing this a great deal, especially when I'm working in the client's office. My biggest issue is that some of my clients are W2 and some 1099. My taxes are becoming slightly more complicated, but still manageable. Yet, just to play it safe, I have an accountant handle filing my taxes.

  • In the late 1980s, contractors sued Microsoft because they were treated as employees without benefits. The IRS held that a contractor is obligated only to deliver the work contracted by the negotiated due date. People who must work specific hours at a specific location using company equipment under the direct company management are employees.

    Today, a staffing firm's client requires the contractor to work on-site for specific hours under direct management as a "W2 employee." This avoids ACA thresholds as well as the IRS definition. It hurts all contractors, as y'all have well noted.

  • One is allowed to have expenses regardless if an Employee or an Independent Contractor. The question becomes where one takes their expenses. If expenses are as an Employee (wages reported on W2), usual and ordinary business expenses are taken on Schedule A. Expenses as an Independent Contractor (income reported on 1099-MISC) are taken on a Schedule C.

    As a tax preparer, I can tell you that this is a frequent topic of discussion with clients.

    The various taxing authorities will tell you that this is not as gray of a matter as we freelancers like to think (or hope) it is. Most of the taxing authorities follow the IRS standards and determinations on when someone can be classified as an Independent Contractor (with income reported on 1099-MISC) and when they must be classified as an Employee (with wages reported on W2).

    Aside: "Wages" is a technical term to the taxing authorities and always implies a W2 employee and never refers to an Independent Contractor. Wages is one type of "income." There are many other types of income, including but not limited to 1099-MISC income. Wages are always income; income is not always wages.

    There is a 20-Factor Test the IRS considers when determining if one is correctly classified. IRS Publication 1779 is the short version of explaining this. https://www.irs.gov/pub/irs-pdf/p1779.pdf

    IRS Tax Topic 762 offers quick information
    https://www.irs.gov/taxtopics/tc762.html

    Other IRS information can be found in Publication 15-A
    https://www.irs.gov/pub/irs-pdf/p15a.pdf

    Once the matter of the status is determined (and it is presumed, correctly), I advise my clients that their rate for work as an Employee should not be the same as their rate (quote) for the same work as an Independent Contractor. Their Independent Contractor rate should be at least 10% more than they would be paid as an Employee. This higher 'cost' to the client company would be offset by them not having to carry Workman's Comp and Unemployment insurance as well as covers the "Employer" share of the Social Security taxes of 7.65% that is now your responsibility as an Independent Contractor (that they do not have to pay).

    Lastly, just because the company could correctly classify you as an Independent Contractor, they are not required to do so. This means if you satisfy the test for Employee, they are required to hire you as such but if you satisfy the test for Independent Contractor, they are not required to hire you as such and can hire you as an Employee. The 1-sheet Independent Contractor http://buttontaxprep.com/Best-Tax-Practices/BTP... may be of some additional help.

    MScott@ButtonTaxPrep.com

  • S Gallagher,

    Thank you for the detailed reply. I appreciate your time and thoroughness! I'm printing it out for reference.

    Ruth

  • These comments are so helpful. It is great to hear what others are coming up against and solutions to these problems (thanks Freelancers’ Union.)
    Personally, my experience is that in larger organizations, 1099-MISC are filled out by one person intermittently (such as an admin) and W-2s are processed by the HR department and accounting. It goes without saying, that it probably ends up being easier to get HR/accounting to take care of this the “right way”, especially if the company has a number of employees/contractors in this situation. This of course, does not necessarily fit the freelancer’s agenda, and the tax guy may end up have some trouble with your business status. Still, it seems like it is the kind of challenge most creative people like to “get into.” Forums such as this, are extremely useful at bringing together the creative and practical input from multiple creative minds addressing similar issues.

  • I'm now a little confused. I've been hired by staffing agencies as a 1099 contractor. I've signed paperwork saying that I'm not an employee and won't collect unemployment, etc. I've worked full-time both on site and remotely for these clients. While I wasn't technically held to their office hours, I was strongly *encouraged* to keep them and was expected to work an 8 hour day. I could take off for doc's appointments and vacations and I didn't earn any leave time but otherwise, I was treated like just another employee. The only restrictions were that if I was working in an office, my badge was only good for certain hours.

    The W-2 contracts I'm getting now are for similar work. All are full-time gigs but limited duration and a mix of remote work and on-site work.

    As for taking expenses, my accountant has said that since I don't own my own house, I get a bigger deduction from the single, head of household than from itemizing business expenses. Hence not being able to deduct when I am hired as a W-2. So I don't quite understand what business expenses I can deduct as a W-2.

  • This comment has been removed with a light and loving touch.

  • Copyright info as well as non-competes and non-disclosures are covered in contracts as well.

  • William, that is NOT TRUE. What happens is typically when you are hired as an employee, you will be required to sign a contract with the company that designates all your work as "work for hire" and therefore all rights belong to the employer. Frequently (in jobs where patents are possible) you will also sign away your patent rights and also agree to help the company obtain patents on work you performed as part of your duties (and in many cases, work that you perform outside of work that pertains to the business of the company).

    You do NOT automatically relinquish your right to intellectual property as part of being an employee. It's all part of your employment contract that you sign as part of the hiring process. That's also where the (frequently) non-enforceable noncompete clauses are stuck.

    I encourage everyone to READ CONTRACTS before signing and strike out clauses that you don't agree with.

  • Just occured to me to check with my acocountant, and she is providing the same info we are sharing here: 1099 contractors are cheaper for businesses because they don't have to pay the employer portion (1/2) of Social Security and Medicare tax. Because of this, the IRS has been cracking down on employers who incorrectly categorize their employees/contractors.

    The plus side for you when it comes to W2s is that 1) you don't have to worry about withholding tax on that income and 2) they are essentially paying 1/2 of your self-employment tax (Social Security & Medicare tax).

    The downside to being a W2 employee is that you can't offset that income with business expenses.

    Here is the IRS's guidelines on who qualifies to be an employee vs. contractor:
    https://www.irs.gov/Businesses/Small-Businesses...

    For anyone who may be interested, she works with creatives specifically, and she also has a small course on "being your own CFO" which is pretty good, I went through it :) She has helpful info on her blog too: http://amynorthardcpa.com/

  • As a tax preparer, I can assure you that one can offset their W2 income with usual and ordinary expenses related to their job or occupation. The ability to take "business expenses" is not limited to 1099-MISC income.

    There are different rules with regards to how those expenses are taken / reported on the tax return. Those differences also cause the net impact to be different when applying those business expenses against W2 income or 1099-MISC income.

    It is simply a false statement that one cannot take their usual and ordinary job expenses against their W2 income.

    With regards to the employer share of Social Security taxes - known as Self-Employment taxes (SE) . . . the total due on the income is 15.3% of the gross. If there is a W2 relationship, the employer is required to pay half of that (7.65%) and the employee has their half withheld as Social Security taxes (FICA + Medicare).

    When there is no employer to pay half, the Independent Contractor is required to pay the entire 15.3% on the profit of their Schedule C.

    This is why I always suggest to my clients that their W2 rate be different than their Independent Contractor rate. Their Independent Contractor rate should be (at least) 10% more than would be their W2 rate.

    Usual and ordinary job expenses are allowed to be taken by anyone regardless if their income is reported on a W2 or a 1099-MISC.

    MScott@ButtonTaxPrep.com

  • After talking with a company about potential gigs, they hire contractors as temporary W-2 employees to give them access to their files. Contractors don't have access to their servers and thus would always need someone to get files and assets for them. I can somewhat understand that, but again, I've worked for other companies as a 1099 contractor and had contractor access. I guess each company is different.

  • If the client company hires contractors directly (and not a third-party temporary staffing company), I can understand this. Their insurance could require that if they are insured against data misuse from employees (and there could be other recourse available if the person is an employee rather than a vendor or an employee of a vendor)

  • The thing about the classification of "W2 Contractor" is that companies using this want to disguise their contractors as employees but do not want to pay contractors as they would employees.

    It has nothing to do with access rights to data on servers; server software doesn't know or care about an individual's employment category. That's a matter of corporate policy alone. A company may claim that their insurance company forces them to do something, but the insurance company probably doesn't care because it is happy to charge more for the same insurance coverage.

    Federal and state law regarding health insurance coverage does play a role in the use of this essentially bogus labor category. Companies want to pay as little as possible, and even less than that, for labor.

    As you probably perceive, I am one who has few, if any, opinions about most anything.

  • No, differentiating between contractors and employees has been going on for a lot longer than the ACA. I've had that issue before. It depends on the company and who they allow access to their corporate website. Some don't care. Others have special contractor access. Some don't allow contractors access at all. It's not about insurance but how companies handle their data. Some of the smallest companies with which I have contracted have the most draconian data policies.

  • The main reason I became a solo practitioner in 2002 was to never step foot into an office ever again!

    In my situation, proofreading at home, a 1099 is really the only practical (and probably legal) thing for me taxwise, however, there is a downside.

    Because I make very little profit each year, I am not paying into Social Security and the only way to INCREASE my retirement benefit (so I am told) is to get a regular part-time job with a W-2. This downfall really sucks, but I am independent, set my own rates, my own hours, and turn down jobs as I see fit; so overall, I am very happy and have no plans to get a part-time job.