Do IT: Employment vs. Contracting in the US (W2 vs. 1099)

IT differs from many professions in the way that employment is handled. This is caused by many factors on both the employer and the employee side. In most careers and certainly in most jobs people work under the “employment” system. Here in the US this can be called W-2 employment because the tax form involved is called a W-2 and contracting is often referred to as 1099 employment because a 1099 tax form is used. (Much of the information in this article is specific to employment within the United States as employment laws vary from country to country.)

There are many differences between these two types of employment. Full employment under a W2 workers are protected by regular employment law. Under 1099 they are considered to be self employed and there are few protections. Under W2 full taxes are paid, as usual and as expected, by both the employer and the employee. This is the same form of payment that you would receive whether you work at McDonald’s or at IBM. Under a 1099 the employer pays NO taxes and all taxes are the responsibility of the contractor. Generally this is offset by the worker receiving higher wage rates to compensate but this must be examined carefully with an accountant as companies will often attempt to pay effectively lower rates via 1099 partially because it is harder to determine what is a lower rate and partially because the people involved are unknowledgeable about tax laws and only think in terms of hourly rates and not in tax ratios and write-offs.

Both systems have their advantages and disadvantages. W2 employees are entitled to certain benefits but 1099 workers have more flexibility. Most people, by far, prefer W2 status but in IT there are a certain number who are willing to work under 1099 and a few who prefer it. Most serious IT professionals that I have known personally over the years have worked a mixture of the two but the 1099 seems to occur most often during the earlier career years when people are more desperate for work to fill out their resumes. But with experience of the tax system and a good accountant a 1099 can be a great way to work. But it does require careful financial management and bookkeeping to make really work well and lends itself towards more ambitious professionals.

When working through a consulting or contracting firm the IT professional may be paid through either a 1099 or a W2. Be sure to always check before accepting a position – you should always specify your required rate as $x/hr on a W2 or $x/diem on a 1099, etc. Never leave the question open to debate later no matter how obvious it may seem at the time. It isn’t worth it. Often consulting firms will use a 1099 to get paid from the customer but will hire the professional on a regular W-2 creating the confusing “W-2 Contractor” position which is valuable and is just as good as any other W-2 to the professional but makes for difficult terminology.

Check with your accountant but in the US you have traditionally been allowed to do a small amount of work under a 1099 without paying any taxes at all. If you get just one small contract a year in addition to full time “normal” work you may get a nice tax break making that contract extra valuable.

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