W2 to 1099

[MrsDarcy]

Hi all!

I am in commission-based sales, and up until now, I’ve been paid as a w2 employee with taxes being taken out, etc. I was put into this situation because I also do a small hourly component for the company. Next year, however, I’ll be switching to a 1099. Do I have to immediately begin to pay quarterly taxes? Can I just saved like 1/3 of my checks to pay taxes? Anything else I need to know? I’ve never been paid like this before. Thanks!!

[RockNVoll]

I don't know enough about the tax component to comment with confidence. As a 1099 employee thigh I wanted to make sure you know to look into opening a SEP IRA. The contribution limits are much higher than in a 401(k) or IRA and can really put you ahead in the long run if your budget lets you set aside a healthy chunk.

[atarianna]

Did you renegotiate your rate when discussing moving to 1099? You will be responsible for paying many items formerly paid by your company like the employer portion of SSI and Medicare tax. When I had looked into moving to 1099, I needed about a 20-30% hourly bump to offfset the payments I would then be responsible for.

[MrsDarcy]

Nov 26, 2021 2:30:04 GMT -5 atarianna said:

Did you renegotiate your rate when discussing moving to 1099? You will be responsible for paying many items formerly paid by your company like the employer portion of SSI and Medicare tax. When I had looked into moving to 1099, I needed about a 20-30% hourly bump to offfset the payments I would then be responsible for.

Well, other than the tiny tiny portion I am paid hourly, I’m at a 50/50 commission split on my sales. So, I’m not sure if there’s anything to negotiate there, other than maybe an increased split.

[jinkies]

Nov 25, 2021 0:07:59 GMT -5 MrsDarcy said:

Hi all!

I am in commission-based sales, and up until now, I’ve been paid as a w2 employee with taxes being taken out, etc. I was put into this situation because I also do a small hourly component for the company. Next year, however, I’ll be switching to a 1099. Do I have to immediately begin to pay quarterly taxes? Can I just saved like 1/3 of my checks to pay taxes? Anything else I need to know? I’ve never been paid like this before. Thanks!!

Yes you have to pay quarterlies, or you will incur penalties. I believe that the quarterlies can be based on your previous year income, rather than having to calculate current year as you go. Of course if you expect your income to be a lot less than the previous year, you would end up overpaying if you do it that way. But should be fine if you expect the income to be roughly similar.

I recommend having an accountant get you set up for the first year. I've always done my own taxes, but I found it was too complicated to figure out all the rules of self-employment taxes on my own. This year I will probably use her again because we have some complications. I'm hoping that next year there won't be too many changes and I will be able to resume doing it myself. But I think it's worth paying for a professional at least to set you up for year 1. 

[MrsDarcy]

Nov 27, 2021 21:03:57 GMT -5 jinkies said:

Nov 25, 2021 0:07:59 GMT -5 MrsDarcy said:

Hi all!

I am in commission-based sales, and up until now, I’ve been paid as a w2 employee with taxes being taken out, etc. I was put into this situation because I also do a small hourly component for the company. Next year, however, I’ll be switching to a 1099. Do I have to immediately begin to pay quarterly taxes? Can I just saved like 1/3 of my checks to pay taxes? Anything else I need to know? I’ve never been paid like this before. Thanks!!

Yes you have to pay quarterlies, or you will incur penalties. I believe that the quarterlies can be based on your previous year income, rather than having to calculate current year as you go. Of course if you expect your income to be a lot less than the previous year, you would end up overpaying if you do it that way. But should be fine if you expect the income to be roughly similar.

I recommend having an accountant get you set up for the first year. I've always done my own taxes, but I found it was too complicated to figure out all the rules of self-employment taxes on my own. This year I will probably use her again because we have some complications. I'm hoping that next year there won't be too many changes and I will be able to resume doing it myself. But I think it's worth paying for a professional at least to set you up for year 1. 

thanks so much! Would you recommend seeing an accountant for 2021 taxes (which should be straightforward, but beneficial to get advice for going forward) or just for 2022?

[jinkies]

MrsDarcy, I just looked back, and I met with the accountant in May of the year that I started working for myself. So I technically missed my first quarterly payment that year, but I don't think it really mattered in the end. She didn't do my previous year's taxes, she just helped me calculate what I should be paying for quarterlies throughout the year, and answered some other questions that I had about getting started.

I would recommend it sometime in the first half of the year, just to make sure you are set up correctly. I think part of the reason that I waited until May was because she was too swamped to meet with me until tax season was over.

[MrsDarcy]

Nov 28, 2021 10:38:30 GMT -5 jinkies said:

MrsDarcy, I just looked back, and I met with the accountant in May of the year that I started working for myself. So I technically missed my first quarterly payment that year, but I don't think it really mattered in the end. She didn't do my previous year's taxes, she just helped me calculate what I should be paying for quarterlies throughout the year, and answered some other questions that I had about getting started.

I would recommend it sometime in the first half of the year, just to make sure you are set up correctly. I think part of the reason that I waited until May was because she was too swamped to meet with me until tax season was over.

thank you! This is super helpful.

[mokes]

Nov 26, 2021 21:12:06 GMT -5 MrsDarcy said:

Nov 26, 2021 2:30:04 GMT -5 atarianna said:

Did you renegotiate your rate when discussing moving to 1099? You will be responsible for paying many items formerly paid by your company like the employer portion of SSI and Medicare tax. When I had looked into moving to 1099, I needed about a 20-30% hourly bump to offfset the payments I would then be responsible for.

Well, other than the tiny tiny portion I am paid hourly, I’m at a 50/50 commission split on my sales. So, I’m not sure if there’s anything to negotiate there, other than maybe an increased split.

Right, but were you paid as W2 for all of your commission also? If so, the company has been paying the taxes atarianna mentioned, so you'll be making less in 2022 even with the same commission % since you now have to cover those costs yourself.

Are you also losing benefits in this transition -- vacation, sick time, health ins, access to unemployment should you lose your job, workers comp should you be injured, etc.? Your company could be saving a lot by switching your status.

I would also check that you're not being misclassified as an independent contractor. I'm an independent contractor and have worked with several companies who tried to treat me as an employee (in terms of controlling how/when/where I work) while providing none of the benefits an employee is entitled to.

[jwright]

Nov 29, 2021 11:20:48 GMT -5 mokes said:

Nov 26, 2021 21:12:06 GMT -5 MrsDarcy said:

Well, other than the tiny tiny portion I am paid hourly, I’m at a 50/50 commission split on my sales. So, I’m not sure if there’s anything to negotiate there, other than maybe an increased split.

Right, but were you paid as W2 for all of your commission also? If so, the company has been paying the taxes atarianna mentioned, so you'll be making less in 2022 even with the same commission % since you now have to cover those costs yourself.

Are you also losing benefits in this transition -- vacation, sick time, health ins, access to unemployment should you lose your job, workers comp should you be injured, etc.? Your company could be saving a lot by switching your status.

I would also check that you're not being misclassified as an independent contractor. I'm an independent contractor and have worked with several companies who tried to treat me as an employee (in terms of controlling how/when/where I work) while providing none of the benefits an employee is entitled to.

I was thinking the same thing.  If you met the definition of employee previously and your job is essentially the same, it seems like you would still be considered a W-2 employee.  Sales jobs aren't all the same and aren't always 1099.  

[jinkies]

So I answered the question you asked, which was what you should do when you switch to 1099.

BUT, I agree with others in this thread, that you should really investigate what constitutes a 1099 employee and whether your role can correctly be classified as a contractor. There are rules around what they can and cannot require if you are not an employee.

Also as others have stated-- as a W-2 employee, your employer pays taxes for you in addition to what was withheld from your paycheck. As a 1099 employee, you are responsible for BOTH the employer AND the employee portion of your income taxes. So if you don't renegotiate your sales percentage, and they do switch you to 1099, you will be taking a pay cut.

[MrsDarcy]

Thanks everyone! Great points to consider.

[orval]

I would also consult an accountant for the amount of estimated to pay each quarter. I would plan on saving closer to 45% for taxes also Self employment tax alone is 15%, I believe. I literally cried the first year I made decent money as a self employed person when tax time came.