Pros and cons of compensation through W2 vs 1099?

[Tina J.]

That's not necessarily true. Unfortunately, the OP ignored my questions.



There is a reason for everything. If your friend wants to know why the other party is doing something, the best way to find out is to ask the other party (or the other party's lawyer).





This is your friend. It has nothing to do with you. Or did you provide false information in your initial post?

Why don't you back up and explain what's actually happening here?

He is my BF. But idk why it being me or him or anyone would make a difference on the answer! lol

 

[cbg]

Here's the bottom line, Tina.

IRS regulation will determine whether a W-2 or a 1099 is appropriate. It's not a choice. It's not his opt one way or the other. He doesn't get to decide what goes on what form. Neither does the attorney and neither does the judge. It is solely up to the IRS.

It will be determined by whether it is wage replacement or something else, which means that it may end up being partly on one and partly on the other, but he's going to owe the exact same amount of tax regardless. HOW it gets paid may be different; whether it's deducted or whether he writes a check, but nothing he can do or decide is going to alter the amount that he owes at the end of the year.

 

[Tina J.]

Here's the bottom line, Tina.

IRS regulation will determine whether a W-2 or a 1099 is appropriate. It's not a choice. It's not his opt one way or the other. He doesn't get to decide what goes on what form. Neither does the attorney and neither does the judge. It is solely up to the IRS.

It will be determined by whether it is wage replacement or something else, which means that it may end up being partly on one and partly on the other, but he's going to owe the exact same amount of tax regardless. HOW it gets paid may be different; whether it's deducted or whether he writes a check, but nothing he can do or decide is going to alter the amount that he owes at the end of the year.

They told him he can request more on W2, but not more on 1099!

 

[cbg]

Unless "They" was the IRS, "they" are not necessarily correct.

 

[zddoodah]

One last time: Why don't you back up and explain what's actually happening here?

 

[justblue]

One last time: Why don't you back up and explain what's actually happening here?

Maybe because it's her boyfriends case and she doesn't have enough facts to adequately explain.

 

[Tax Counsel]

My friend had a settlement agreement with his previous company and they are going to issue him $30K. But the company is splitting it up into 2 parts: with half of it taxed (reported on an IRS Form W2) and half untaxed (reported on an IRS Form 1099).

Wrong. The amount reported on the Form 1099 is also subject to tax. As to why they are splitting it into two parts and whether that's appropriate depends on the details of his claim and settlement.

 

[Tax Counsel]

That's not necessarily true.

Since the claim is against his employer it is pretty much guaranteed that the amount reported on the 1099 is taxable income, assuming the employer understands how 1099 reporting works.

 

[Tina J.]

It's one of the biggest companies. If W2 is ending up better for us (half taxes), the weird part is company is willing to increase the W2 portion, but not the 1099 (untaxed) portion! So weird...

 

[Tax Counsel]

It's one of the biggest companies. If W2 is ending up better for us (half taxes), the weird part is company is willing to increase the W2 portion, but not the 1099 (untaxed) portion! So weird...

Again, the 1099 income is subject to income tax. The difference between being paid wages (for which you get a W-2) and being paid nonemployee compensation (self-employed/independent contractor income for which you get a Form 1099-NEC) is how your Social Security and Medicare taxes are paid. When you are an employee, the employer pays half that tax for you and deducts the other half from your paycheck. So you end up paying half the Social Security and Medicare tax yourself. But when you are self-employed, you pay all of the Social Security and Medicare taxes yourself, but the effect of that is softened a bit because you do get an income tax deduction for what would have been the employer's share of that, i.e. one-half. So yes, he'll pay a bit more Social Security tax with the nonemployee compensation (1099) than with wages (W-2).

What the company should do is pay wages or nonemployee compensation as appropriate based on the settlement terms. It is possible in some cases against an employer to negotiate the settlement to include more of what is wage income and less for the non wage claims or vice versa, if the lawsuit involves both types of claims.

 

[flyingron]

Well, two things to note. A company can ALWAYS treat you as an employee even if you might have qualified as an independent contractor. You and the company can also craft your role so that you do qualify as an independent contractor.

As pointed out, the employer in the case of employees, must pay half the SS tax and there may be other benefits. On the other hand, the contractor may be able to recoup more business deductions that wouldn't normally be available to an employee.