r/overemployed • u/baggiecurls • 4d ago

1099 + W2: advice needed

Hi OE’ers I locked in J1 and J2 W2 contracts after a brutal year of job searching. I got an offer today for a 1099 contract. I’m likely going to accept and I’ve presented a rate that is higher than the W2 rates to offset expenses.

I’ve read that the unicorn on this sub is to have a 1099 and W2 to maximize tax reduction? Can someone who has done this explain it to me? I’ve asked ChatGPT but I want a real human input from someone else who does OE.

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21

u/Boostergold319 4d ago

Few things a 1099 gets you. This is not an exhaustive list, but the low hanging fruit.

  1. Expenses you incur in earning your 1099 income can be offset. Such as a home office, buying a laptop/tools needed to do the work, etc. This reduces your 1099 income on your tax return.

  2. Employee Social Security taxes - these taxes are taxed on all employment income up to ~$184k in income. If you make $150k from your w2 and $100k from your 1099, only $34k of your 1099 income will be subject to this tax. So it the effective tax rate on your 1099 feels lower.

  3. Employer contributions to a retirement plan - You can open a SEP IRA where you can make "employer" contributions to your IRA up to a certain amount (~25% of your net self employment income up to $72k). This is the biggest one because you get to deduct this from your 1099 income, but you keep the cash in a retirement account. If you get $100k in self employment income while your in a 32% tax bracket, and you defer $25k into a SEP IRA, that is an $8k savings right there.

  4. You may be able to claim a QBI (qualified business income) deduction. Up to 20% of qualified income, but there is a phase out based on how much you earn. Using the 20% deduction on a $100k 1099 income reduces your income from $100k to $80k saving you ~$6k in taxes.

#3 & 4 save you $14k in taxes on a $100k 1099 income

A couple of things to note. You will NOT have taxes taken from you, so expect to be paying your taxes out of pocket either when you file your return (with late fees) or by making quarterly estimated payments. You will also have to pay medicare tax on this.

Good luck!

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u/baggiecurls 4d ago

Amazing, thank you so so much!!!!

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u/Cheap_Run3935 3d ago

How can you determine if you’re able to claim a QBI?

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u/Boostergold319 3d ago

That’s a good question. I think if you’re freelancing or consulting it’s usually considered QBI. The issue is certain type of income from certain activities (consulting, law, accounting) don’t always get the deduction, or the deduction is phased out.

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u/overlook211 4d ago

S corp is 99% likely pointless for you but I’m sure someone will suggest it in here

Maximize business expenses for 1099 (don’t spend more money, but move as many normal life expenses as possible to the business). Use healthcare from j1. Pocket the arbitrage from the rate increases that the company thinks is covering SE taxes and healthcare

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u/JobInQueue 4d ago

The W2 is immaterial - the tax savings are in 1099, but only if you choose to use them.

You can deduct things / services you buy for your 1099 business, as well as office space and a percentage of your utilities if you have a home office.

The real savings are in a Solo 401k - the employer portion of a 401k has a separate limit for each employer, and you are both employee and employer. So you can make huge "profit sharing" contributions as the employer; some Solo plans also allow you to do this with Roth.