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Re: Switch from 1099 to W2 - Advantages/Disadvantages?

I think what you're asking is what professional expenses can you deduct against your independent contractor income on a Schedule C when you work as both an employee and a contractor. A lot depends on the portion of your time spent and income earned at the W-2 jobs versus the 1099 jobs.

That being said, here is the answer we give to that question:

We get this question a lot. And here is an area where you can be aggressive with your taxes. Remember, the more expenses you claim direclty against your 1099 income, the less taxes you’ll end up paying.

Here is the advice I give my clients. First, make sure you can substantiate the expenses you’re claiming. For the most part, that means having receipts or other documentation. For your home office, you’ll need to demonstrate that you use a portion of your home exclusively for business on a regular basis.

Then, if you get audited, the IRS agent will also ask you to explain why each item you claimed against your 1099 income is related to your 1099 income. Here is where things get a little tricky, however, if you can at least document that you spent the money as I mentioned in the paragraph above, you’re more than halfway there.

Zip Code: 01801

Re: Switch from 1099 to W2 - Advantages/Disadvantages?

There is one advantage of being paid partly as a W-2 employee and having the remainder of your income paid as an independent contractor.

Each year, you only pay social security taxes up to a certain limit. For 2011, the max in $106,800, increasing to $110,100 in 2012. When you work as an employee, your employer withholds Social Security taxes at a rate of 6.2% (currently reduced to 4.2%), and then your employer matches the taxes withheld (at a rate of 6.2%). When you're self-employed, you pay this tax as part of your federal income tax return. It's called the "self-employment tax".

The self-employment tax is based on a Social Security tax rate of 12.4% (currently 10.4%) and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee's portion and the employer's portion of both taxes.

If you earn income as an employee and as an independent contractor, and your combined income exceeds $106,800 in 2011 or $110,100 in 2012, you stop paying the 12.4% (currently 10.4%) portion of the self-employment taxes. So you need to reduce the $106,800 (110,100 in 2012) max by the amount of Social Security wages you receive as a W-2 employee.

The moral of this story is that any wages paid to you as a W-2 employee will save you on the self-employment tax at a rate of 6.2% of the wages earned, assuming your total income will exceed the annual Social Security Max.

Zip Code: 01801