Pros and cons of compensation through W2 vs 1099?

[Tina J.]

Jurisdiction

Illinois

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).

Why are they doing it? What's the best for him to pay less taxes so that he can negotiate on it?

 

[justblue]

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).

Why are they doing it? What's the best for him to pay less taxes?

Your friend should ask their attorney this question.

 

[Zigner]

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).

Why are they doing it? What's the best for him to pay less taxes so that he can negotiate on it?

There's really no way any of us could answer the "why"...but either way, he's going to pay taxes.

 

[justblue]

Best strategy to negotiate severance with a company after unlawful termination?

 

[zddoodah]

My friend had a settlement agreement with his previous company

Settling what?

Why are they doing it?

Why would anyone here possibly know?

What's the best for him to pay less taxes so that he can negotiate on it?

Huh?

Sounds like your friend needs an attorney to advise him. People who know nothing about his case, many of whom aren't lawyers, and most/all of whom are not in Illinois have no possible ability to answer this question intelligently.

 

[Tina J.]

I think the answer really lies on the general difference between W2 and 1099. He has no attorney.
You can look at the link justblue shared for the description of the charge he made with the EEOC and he is compensated for that now.

 

[justblue]

I think the answer really lies on the general difference between W2 and 1099. He has no attorney.
You can look at the link justblue shared for the description of the charge he made with the EEOC and he is compensated for that now.

In that thread you posted it as your own situation. Which is it, about you, or about a "friend"?

 

[adjusterjack]

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).

Oh, it won't be untaxed. There just won't be any tax withheld. He'll still have to pay tax on the income.

Why are they doing it?

Sorry, my telepathy machine is in the shop. I can't reach the employer's mind today.

What's the best for him to pay less taxes

He won't pay "less" taxes. He'll pay the exact amount of tax that he's supposed to pay based on the amount paid (either way) and appropriate adjustments.

 

[Tina J.]

There should be a reason why the company is doing it. But we want to know the individual impacts on his taxes either way.

 

[Zigner]

There should be a reason why the company is doing it. But we want to know the individual impacts on his taxes either way.

There may be a reason why the company is doing it, and my guess is that it would save on employer-paid employment taxes. There should be no change to the taxes that your friend will pay.

 

[PayrollHRGuy]

There should be no change to the taxes that your friend will pay.

What about the employer side of Soc. Sec & Medicare. That is an additional tax that the worker will have to pay if the money is reported via 1099.

 

[Tina J.]

What about the employer side of Soc. Sec & Medicare. That is an additional tax that the worker will have to pay if the money is reported via 1099.

Isn't Social security and Medicare tax paid on W2? Not 1099? I'm confused.

 

[PayrollHRGuy]

Isn't Social security and Medicare tax paid on W2? Not 1099? I'm confused.

Yes, that is why there will be additional taxes on the 1099 funds.

 

[Tina J.]

So shall we tell the company to report all as W2 to benefit us?

Googling, it says:

Eventually independent contractors (1099) will actually owe higher taxes than employees. This is because not only will income tax be taken out, but self-employment tax as well. 1099 workers are also expected to pay twice as much for social security and medicare taxes.

 

[adjusterjack]

I just thought of something. What kind of "settlement" is this? Does it consist of wages and perhaps non-wages? If yes, then it stands to reason that the non-wages would go on a 1099.

 

[PayrollHRGuy]

So shall we tell the company to report all as W2 to benefit us?

You have no standing to tell the employer anything. Your friend will save about 6.2% if the wages are paid via 1099. Your friend should likely speak to a lawyer that practices tax law because in actuality the employer should have no option in the matter.

 

[PayrollHRGuy]

I just thought of something. What kind of "settlement" is this? Does it consist of wages and perhaps non-wages? If yes, then it stands to reason that the non-wages would go on a 1099.

Good point. I was just thinking wages.

 

[Tina J.]

They didn't mention anything. Just dividing all into 2 halves.
I'm getting confused again...why "save about 6.2% if the wages are paid via 1099"? We just concluded 1099 will cause more taxes.

 

[PayrollHRGuy]

They didn't mention anything. Just dividing all into 2 halves.
I'm getting confused again...why "save about 6.2% if the wages are paid via 1099"? We just concluded 1099 will cause more taxes.

Sorry, my typo. I should have written W2.

I am curious. How are you so sure what your friend's employer said about this?

Also, it does matter if part of the payment is something other than wages. If the amount being paid is all wages it should be paid via W2.

 

[zddoodah]

Oh, it won't be untaxed. There just won't be any tax withheld. He'll still have to pay tax on the income.

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

There should be a reason why the company is doing it.

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).

we want to know the individual impacts on his taxes either way.

So shall we tell the company to report all as W2 to benefit us?

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?