95K Salary as a W2 full-time employee vs. 100K Salary as a 1099 independent contractor. Which is worth more in the long run?
Firstly, I'm not an accountant, so all of this should be verified with a CPA. Also, it may be moot if the startup is requiring you to work in their offices - technically, this would immediately qualify you as a full time employee.Saying this there are advantages and disadvantages to being a 1099 employee, here are a few (by no means a comprehensive list):DisadvantagesTaxes: You have to pay both self employment tax (i.e. the employer's half of social security (FICO)) and medicare. This adds an additional 7.65% in tax contributions immediatelyBenefits: Your health insurance payments will be 100% your responsibility Termination: Unless you write it into your freelancer contract, they will not have to give you any notice before termination. I.e. They can tell you today that you are no longer employed and that's itAdvantagesWorking as a 1099 contractor can become even better if you form an LLC or S Corp for yourself so that you can perform "corporation-to-corporation" contracting. As I understand it, this can also help get around the issue of working on another company's premises as well. IMO It's usually not worth going through the trouble to form an LLC or S Corp if you're making less than $70K USD or so, but for $100K it should be. The below list is written from the assumption that you created an LLC for yourself.Write Offs: As a contractor, every single expense that is even slightly related to work becomes a write off. This includes conferences, magazines, meals, seminars, bus tickets, train tickets, computer hardware, office equipment, chairs, legal fees, accounting fees, rent, etc. , etc., etc. This means that you subtract these expenses in part (lunch) or in total before you calculate any taxes. Depending on your line of business, this can reduce taxable earnings dramatically.SEP IRA: After you have subtracted all of your expenses, the IRS will allow you to contribute up to 25% of your taxable earnings (up to $53K in 2021 @SEP Plan FAQs - Contributions). This is usually far more than the 401K cap. Of course this is a retirement savings plan, so once you've contributed you really can't touch the money until you're 69.5 (with a few exceptions) Flexibility: There is no reason your LLC can't bill multiple clients, unless you've entered into a contract that precludes you from doing thisSaying this, let's say that you have $30K in expenses (including health insurance) and then you decide to contribute $17,500 to a SEP-IRA. This immediately takes your taxable income from $100K per year to $52,500K per year. Needless to say, even having to pay an additional $4,016 in self employment taxes pales in comparison to the federal and state income tax savings (assuming you don't live in a tax free state) from reducing your tax bracket from $100K per year to $52,500 per year.One last thing to remember, contracting/1099 employment is not for the faint of heart. It offers less certainty than W2 full time employment, saying that, if you are confident in your ability to win new clients (err jobs) and don't mind committing a little time to your tax strategy, it can be a good way to maximize the amount of cash you actually get to keep and spend.