Overview
Main Menu Name: E'ee vs Ind
This calculation determines the tax for a taxpayer serving a business in one of two capacities: (1) W-2 Wage Employee vs. (2) 1099 Independent Contractor ("IC"). The resulting tax is a combination of federal and (self-)employment taxes State taxes are ignored. The W-2 Wage Employee is not eligible for a §199A Deduction. A 1099 Independent Contractor, in effect, owns an interest in a business (his/her own), and may therefore be eligible for a §199A Deduction.
In this article:
Background
Employee/W-2 Wages
An employee is disqualified from claiming a §199A deduction based on W-2 wages earned. Although an employee doesn't benefit from a §199A deduction, the W-2 wages paid to that employee can help the owners of the business (if it is a relevant passthrough entity) claim a §199A deduction if the Wage test is needed.
Independent Contractor/1099 Income
An independent contractor (IC) is treated as a "trade or business" as long as the IC meets the applicable tests (Section 162: profit motive; regular, extensive, and continuous activity). As such, it represents a passthrough business which is eligible for a §199A deduction.
Changing from Employee to Independent Contractor
The general rule is that, if you switch from employee to IC status, with no significant economic changes in your new status, there is a rebuttable presumption (for three years after the switch) that you are still an employee. Thus, even though you will now be receiving a 1099 for your income, this income will no longer count toward the W-2 Wage test of your former employer, and you may not claim a §199A deduction. If you can rebut this presumption through records such as contracts or partnership agreements, or if you wait three years, you may then enjoy your new status as an independent contractor.
Getting Started
Entering Data
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Tax Year: Enter the year for which the federal income tax is being calculated. The program handles from year 2018 onwards. For future years, the program will default to the current year.
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Filing Status: Choose the applicable filing status - Single, Joint, Separate, Head of Household, or Estate or Trust
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W-2 Employee Wages: Input the box 1 amount from Form W-2 Wages.
- Independent Contractor 1099 Income: Enter the total 1099 income for the taxable year.
Results
The purpose of this screen is to illustrate the difference in tax results for a worker serving as an employee (earning W-2 wages) vs. an independent contractor (earning 1099 income).
Fact Pattern
Assume the following:
Employee (Wages): | $100,000 |
Independent Contractor (1099 Income): | $100,000 |
Employee/W-2 Wages
Calculation:
Taxable Income: | $100,000 |
Federal Income Tax: | $13,879 |
E'ee Share of SE Tax: | $7,650 |
Net after Tax: | $78,471 |
Independent Contractor/1099 Income
Click on the Calculate button to determine the §199A deduction.
Calculation:
1099 Income: | $100,000 |
less: Deduct for SE Tax: | -$7,065 |
Total AGI (1040,L7): | $92,935 |
less: §199A Deduction: | -$18,587 |
Taxable Income: | $74,348 |
Federal Income Tax: | $8,541 |
SE Tax: | $14,129 |
Total Taxes: | $22,670 |
Net after Tax: | $77,330 |
On these facts, the difference between the two results is small (only $1,141). On other facts, the difference could be smaller or larger.
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