Should I join a start up as a 1099 employee or W2 employee?

Answer by Wray Rives:

First off it is not really a choice you make of being an independent contractor or employee.  If you receive a 1099, you are not an employee and just referring to yourself as a 1099 employee, probably means you don't qualify and you really are an employee who should be receiving a W2.

There are three categories of facts regarding your relationship with the company that is paying you.  These facts will determine how you should be classified.

  1. Behavioral- Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial- Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship- Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

If you are an independent contractor, then you will be responsible for paying all of your own employment taxes, including self-employment tax of 15.3% of net income which is on top of regular income tax.  You should file a schedule C with your 1040 tax return to report your net earnings from self-employment.  As a general rule the business is also not going to withhold any federal or state tax, so you may need to make estimated tax deposits to cover your liability.

Independent contractors can receive compensation through non-statutory stock option plans, but only employees can participate in qualified incentive stock plans.  Only employees can be part of a company group medical, HSA and company retirement plans.  Self employed individuals have to set those benefits up for themselves.

None of that is to say that being self employed is a bad thing, because I believe there are a lot of advantages to self employment in the flexibility you gain, ability to take tax deductions for business expenses that might otherwise be limited for employees and self employed individuals can typically contribute significantly more to their individual retirement plans than they can through an employer sponsored plan.

So, you don't get to choose if your are an independent contractor or employee the facts and circumstances will dictate which category you fit into.  There are significant penalties for a company if they mis-classify you.

You can find more information Independent Contractor (Self-Employed) or Employee? from the IRS.

Should I join a start up as a 1099 employee or W2 employee?