Ep. 47 | W-2 vs 1099 Employment Classification
Download MP3Welcome to the Teaching Tax Flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.
Speaker 2:Hey, everybody. Welcome back to the podcast. Today, we're gonna really dive into demystifying those differences between a ten ninety nine contractor and the w two employee. If you really want to upset your tax professional, maybe mess with them and tell me you're a ten ninety nine employee. So, if that doesn't make any sense or if you're intrigued on why that would irritate them, be sure to listen to this show.
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Speaker 2:Hey, everybody, and welcome back to the Teaching Tax Flow podcast. I am John Turepalski, the cohost here from the TTF team. As always, Chris Pacquero, our little tax wizard, is here with us. We, we reeled them back in as always. So how's it going, Chris?
Speaker 2:Little tax wizard. Is that are you alluding to my really geeky days of playing Dungeons and Dragons when I was a kid? Because that was I was referring to the amount of hair that you have. Very little. So I I haven't.
Speaker 2:You know what? You you know what? You you say the pickleball jokes, and then I get to pull out the hair jokes on you. So this works out great. So we got a great topic.
Speaker 2:As I always say and by the way, I know I always say we have a great topic. If they weren't good, we wouldn't do them. So we're gonna do a nice comparison between w twos and ten ninety nines. So if you don't know which one of those you really fall into, you may have bigger problems. But that's why we bring on these guests.
Speaker 2:So so, Chris, why don't you tell us about our guest for today who's joined us on this topic?
Speaker 4:Well, we are honored to have Jason Moll, CPA and enrolled agent, actually. You got both bases covered. Straight out of the main streets of Spring Hill, Tennessee. So pretty much my neighbor. Jason and I have known each other for, gosh, almost since I moved here, down here to Middle Tennessee for, and he has his own CPA practice.
Speaker 4:He does an amazing job. I'll let him kinda talk about his niche, But, he he's a young guy, but also is full, really hands on with his clients, not only on the tax planning, preparation side, but also helps them with, bookkeeping, getting set up on QuickBooks online. And he's a perfect person to have come in to talk about w two verse ten ninety nine. We get a lot of questions sent to us about employer classification. There's some technical issues with IRS on that.
Speaker 4:And Jason has probably heard if if we him and I had a dollar every time someone said, hey. I'm a w two employ or a a ten ninety nine employee or a w two contract. Like, you can't be both. You we are either one or the other. And we really but but from a teaching tax flows perspective, we really want people to understand that, traditionally, it was it was better to be have a receive a w two, but, actually, it could be better to get a ten ninety nine.
Speaker 4:But regardless of what's better, we have to understand the differences between those two employer play classifications. And w two and ten ninety nine are simply IRS tax forms that are sent to an employee or an independent contractor. But, Jason, welcome to the Teaching Tax Flow Show.
Speaker 5:Thanks so much. Appreciate you guys having me.
Speaker 4:Our pleasure. Could you tell us, could you tell us about your practice? And you have a really unique story coming from the entertainment industry. You're probably the only person that's moved from California to Middle Tennessee. Oh, here's our guys gotta mention California on the show.
Speaker 4:But, Kent, can you tell us a little bit about your yourself, and what led you to start your own CPA practice and and and a little bit about your practice?
Speaker 5:Absolutely. So, you mentioned I am a CPA, also an enrolled agent. I kinda got the enrolled agent as I was working through the CPA exams just to kinda allow me to to jump in and start working with the clients and building the practice. But, like you mentioned, I'm originally from Orange County, California, Southern California. And, yeah, I got my start in entertainment, and that wasn't, you know, it wasn't intentional.
Speaker 5:It just so happened that when I was, you know, in college looking for jobs, trying to find a place to land and and learn, you know, the business and the industry, was working with a recruiter, and it just so happens that 75 to 80% of the CPA firms that they place people with are entertainment firms. So, kinda just got thrown into it. Started off doing roles, more on the business management side. So it's kinda like a bookkeeper and a a glorified executive assistant rolled into one. And, I knew I knew early on that I wanted to do tax.
Speaker 5:You know, just with tax being such a huge part of someone's financial life, arguably, it's one of the biggest expenses that we have in our life. I wanted to know it and be able to understand it for myself, and I also knew that's, you know, just gonna be a huge way to add value to clients. Really, to put it plainly, it's kind of an easy sell if you know it and know how to talk people through it. So, worked at a a smaller firm doing business management, kinda moved to a larger firm that was, a lot bigger, about 50 employees there, and I worked exclusively in the tax department. That firm also had in house, wealth management firm that had almost a billion dollars of assets under management.
Speaker 5:So I got some experience working there as well. But, I knew pretty early on, I wasn't gonna do well working for somebody else. So, you know, I I knew I wanted to kinda work for myself. So I started picking up clients really as early as I could. And then, back in 2018 when we moved to Nashville from Southern California, I kinda just took the leap and quit working for other people and started growing organically.
Speaker 5:So, still working with people in entertainment a little bit, more so. You know, in Southern California, it was kinda TV and film. Moving out here, working a little bit more with people in music. But lately, I've come become a little bit more of a generalist, working with really any small business owner that, needs help and and wants to work with me. So that's that's kinda where we stand today.
Speaker 4:Awesome. I appreciate that. And and kinda segueing into this issue, well, the reason we really wanted to have you on as the guest of this show is that this this employee employer employee employee Mint sorry. Employment's classification is gets more difficult the smaller a business is. And you probably have a lot of your clients come to you with with questions of how to how to classify labor.
Speaker 4:So we're gonna take away we could talk about the tax advantages of each each side, in a few minutes, but what what advice would you give as far as, what what are things to consider, when if you have a client come to you and say, hey. I'm I'm thinking about hiring someone. I'm really not sure if I they should
Speaker 5:be on payroll or not. Yeah. For me, kind of the nuts and bolts of that question and the answer, it comes down to really talking with the person that you're gonna hire, getting a a feel for what they're gonna do, getting a feel for, their understanding of what a w two employee is versus a ten ninety nine contractor. If you have somebody that, you know say you're bringing in someone to help you as an executive assistant, that person, they might have some other random job and they might be coming in and you're gonna teach them how to do it. They're not working for other people in that capacity.
Speaker 5:They don't even know what a ten ninety nine contractor is, you know, that's a situation where you're either gonna have to educate them and say, you know, hey. Is this something that you wanna work for us exclusively? In which case, you know, we can bring you on as a w two employee, you know, pay that half of the Social Security and Medicare tax, kinda train you for this role? Or is it something where, you know, maybe you wanna work for us part time, maybe you want to have some other clients that you work with, doing the same thing. So, really, it comes down to having a conversation with the persons you're hiring and kinda setting expectations for, you know, what exactly the role is.
Speaker 5:And, Jason, did you ever talk with any clients, by the way, business owners that I mean, it's kind of
Speaker 2:an old way of thinking about, I guess, coming again. Me me not me not being a CPA or an enrolled agent like either you smart gentleman. So business owners are always used to and this is, know, when I was in my early twenties, I remember somebody telling me, like, oh, if you give office hours, that's the big qualifying question. Right? Like, if you give somebody office hours, they are an employee.
Speaker 2:They are a w two. Is that, I mean, I'm sure that's changed because obviously, I mean, everybody not everybody. A lot of people have gone to remote working, so things have changed a little bit. But are there any questions like that that you might ask early on? Just kind of qualifiers.
Speaker 2:Say, hey. Do they meet this? Do they meet this? Do they meet this? No.
Speaker 2:They cannot be a contractor. And then kind of on the other side of it too, do you have people that, you know, clients that come to you and say, well, we're we're all contractors. And you look at them and say, well, these two over here, those are problem children. You might wanna reconsider that. And then how do you really handle that relationship a little bit or that conversation?
Speaker 2:Yeah.
Speaker 5:It's tough. So the IRS does have a 20 checklist. They have basically a a question a questionnaire, effectively, that you can go in and answer, either as, you know, the hirer or the hiree and kinda use that to evaluate where do I fall here. And, admittedly, when you do that, it's never almost never cut and dry. You know, there's it's just almost always you could make an argument for either way.
Speaker 5:I think, generally, most of what I see is employers wanting to just put people on ten ninety nine because it's easier. Typically, you don't have to file any paperwork to, you know, tell the state that you've hired somebody. You don't have to set up a fancy payroll system that, you know, collects sales taxes. You don't have to pay half of the, not sales taxes, payroll taxes. You don't have to collect half of the Social Security Medicare, pay that in for the employee.
Speaker 5:So, in my experience, most of the time, employers kinda air that way. They're just like, I'm just gonna pay somebody $10.99 because it's easier. I would say that has become, in my experience, a little bit less of an issue in more recent years, partly because of the kind of the huge push to people to begin freelancing and having side hustles. I feel like a lot more people understand what it is to be a contractor or to be a ten ninety nine person, a freelancer, as opposed to being an employee, now than maybe, you know, five, ten years ago. And so it may it might be a little bit easier to have somebody that wants to work with you that's more open to working as a contractor as opposed to wanting to come on board as a w two employee.
Speaker 2:Oh, makes total sense. And then the maybe some of the I mean, without getting too far out of the weeds, but, you know, what are what are the ramifications for, say, an employee that goes out and hires all contractors. Right? But yet they have an office. Their office is staffed.
Speaker 2:Like, there's a lot of red flags in something like that. Like, what is what does it look like? What kinda what kinda trouble are they in, for lack of better terms?
Speaker 5:Yeah. It's I mean, that's a good question. So, actually, one of the first experiences that I had, working as an accountant, I worked at a a nationwide construction firm in college, and I don't have their information posted anywhere. So no one's gonna know who it is.
Speaker 2:We won't dig it up. We promise.
Speaker 5:You won't find it anyway. Good. Good. Good. They they did work all across United States.
Speaker 5:And so I came in in college, I was probably a sophomore in college, and I was kinda kinda acting as like a controller, handling payroll, paying bills, doing all that kind of stuff. And they had 20 to 30 contractors that would go out and, work all across The US every single week, doing construction, installation, and things like that. And, that's kinda one of the first things I noticed. There there's this back and forth of, like, you know, are they contractors? Are they employees?
Speaker 5:And, you know, there were issues at that, that job that I had about, employment classification. There were some of those people that that disagreed about being treated as a contractor, and, you know, there's there could be ramifications with the IRS. If somebody feels like they're misclassified, they can file, I believe it's form SS eight, to basically send that into the IRS and ask for a determination on whether they're a contractor or not. If somebody's paid as a contractor and they disagree and they think they should be a w two employee, they could also potentially, I believe they could file, like, a substitute for a w two on their personal tax return. I believe that's form eight nine one nine, if I'm not mistaken.
Speaker 5:And, basically so that's in that in that case, somebody gets a ten ninety nine and they think they're a w two contractor or a w two employee and they file that form, it could put the employer on the IRS's radar, and they could essentially do an audit and potentially make them file payroll tax returns, pay that Social Security and Medicare tax in on behalf of, of that contractor who should have been an employee. There's also unemployment issues, unemployment insurance issues with, you know, people that are, a super common one is, someone that's paid as a contractor and, they don't even know what that is and they get let go and they go to, file for unemployment. And the unemployment office basically says you're you're not an employee. You have you have no reportable wages to claim as, you know, yet no premiums have been paid in for you as an employee, so you can't collect unemployment, and that could lead, you know, to a state audit in that case. So, plenty of things can can go wrong if you mess it up.
Speaker 5:And and, really, again, in my opinion, it comes down to being on the same page. The person that's hiring and the person that's being hired, you have a conversation there, both parties understand what they're getting into, that can overcome a lot of potential hurdles.
Speaker 2:Absolutely. And this question actually for both of you guys. So regarding taxes, so it's this is for, you know, like, our our general listeners out there. You know, contractors, I know we did a did an episode and we have a lot of content on our courses about gig workers. So gig workers aren't necessarily just an Uber driver.
Speaker 2:We love our Uber drivers as we always say. You know, those are your freelance graphic designers or writers or consultants, etcetera. So, again, from the tax side, what would be the benefits? I know we talked about a little bit. The benefits to actually, quote, unquote, going into business for yourself as a contractor and those relationships with your clients versus the w two side.
Speaker 2:So let's almost envision this and kind of visualize this for somebody. They have two opportunities in life. They can either go left and take a full time position in an organization or, say, within the same organization, they could come in as a contractor. So maybe, again, kind of between both of you guys, kinda walk us through those options. Same person, same company, same job in a sense.
Speaker 2:Obviously, some differences in classification there. So walk us through how that would benefit regarding taxes. And, Chris, maybe you wanna start us off in that one?
Speaker 4:Right. Well, I think I wanna Jason made a great point before we jump into this is that when you're looking at that employee versus independent contractor classification, the risk is on the person that is, employing, I guess, or hiring, I should say. Right? Hiring the the person providing labor. And like Jason said, you there's a lot of exposure for payroll taxes.
Speaker 4:If you if someone's deemed to be an employee and if they go back three years and you owe payroll taxes for that person plus the penalties, that is very punitive. Ouch. Other issue is you could get wrapped up with Arissa. So let's say they have a retirement plan at the within their company and you were included, you do not wanna get you do not wanna get involved with that where where all of a sudden you should have made all these contributions to a retirement account on behalf of an employee. Health insurance.
Speaker 4:So, like, Jason mentioned something really important when it comes to that relationship. Let's be I mean, basically, it's gonna be hard for anyone to know something that someone's misclassified unless something happens. But what can happen is and even he Jason mentioned someone goes to get unemployment benefits or someone's making $60.70, $80,000 a year out of ten ninety nine, and they think in their mind their taxes are getting taken out, and they owe $20,000 on the taxes, and they can't pay. And then the IRS comes in and says, okay. Well, wait a sec.
Speaker 4:You shouldn't have been you shouldn't have been an independent contractor anyway. And who do you think the IRS is gonna be able to collect money from? Someone that a business owner that's employing several people or this, this person that's kinda on on an island that was misclassified? So those are the the risk is all on the person paying. But, you know, with the Tax Cuts and Jobs Act of 2017, there are actually are some advantages.
Speaker 4:We talked about that in our podcast, not all income is taxed the same. That someone that's an independent contractor that, maybe Jason could touch on that, you know, they might get QBI deduction, or they maybe they could take some legitimate expenses against that income.
Speaker 5:Yep. Those really, those are the two major ones that come to mind for me. You know, after the tax cuts and jobs act, that got rid of the 2% is I don't even remember it now. Was that a 2% AGI floor for, employee expenses?
Speaker 4:Right. Yeah. Unreimbursed employee expenses. Correct. Right.
Speaker 4:So if
Speaker 5:you're a w two employee, it used to be that you could, deduct your, you know it's kind of an oxymoron, but they call them unreimbursed business employee expenses or employee business expenses. But, essentially, expenses that you incurred, you know, in the line of work that you were doing as an employee, the IRS would let you take some of that as a deduction on your personal tax return, but that's gone after 2017. So, you know, if you're a freelancer, you know, business owner ten ninety nine, you can deduct, you know, under IRC section one sixty two, you can deduct any of your business expenses that are ordinary and necessary in doing your job as a contractor. So, huge benefit. Right?
Speaker 5:You're taxed on on the net, not on the gross of what you make in that role. Versus now, employees, you're taxed on the gross. There's there's no way to beat that number down except for, you know, working less, and that's gonna leave you with less money. And, you know, like you mentioned too, the the QBI deduction, you know, if you're a freelancer, you're a sole proprietor in the eyes of the IRS, that is an entity that is eligible for the 20% QBI deduction. So subject to other other limitations, you know, deducting half of your, self employment tax and all that stuff, the IRS is basically gonna chop 20% of your net income off of your taxable income before calculating how much you owe.
Speaker 5:So definitely, there are definitely benefits, you know, to being a freelancer. Again, in addition to that, you know, move towards more people being freelancers, there's more of an incentive now, actually, to be taxed that way. Of course, you know, the benefit of being an employee is that your, employer's gonna pay for half of your Social Security and Medicare tax, which is nice. And then also there could be other fringe benefits associated with being an employee, like health insurance, workers' compensation if you get injured, you know, doing your job. So, yeah.
Speaker 2:So, really, there the benefits as a whole is being a ten ninety nine far outweigh that of a w two, but the w two is kind of a a set it and forget it. Right? Like, you you have almost zero control in some regard. You have very little control on the tax that's being paid versus if you're a con a ten ninety nine, a contractor. You I mean, the the ball's really in your court as long as but, again, that's the assumption that you have to make.
Speaker 2:If if you choose to go that in that direction, you have to be willing to take that role and responsibility of figuring that out, or you're gonna get, in a sense, taxed to death, if you do nothing or you or you go the other way and just write off every single thing you could possibly think of, and then you're basically the most unbankable person on the planet if you go to buy a house, which is a whole another topic, which I know we've talked about over and over again in other episodes. Mhmm. Ant of worms.
Speaker 4:There so there are yeah. I mean, there are there are benefits of each one. You know, I think that the the the important thing to remember that is is that if you have a business or you are an independent contractor, or just make sure that you're if you own a business, you're classifying your labor properly. We always know there's a gray area. And, but the facts and circumstances, which is your behavioral control, your financial control, and your relationship with the parties, that's gonna dictate, what that person is.
Speaker 4:And I would advise we're not attorneys here, but I would advise no matter what your classification is is to have some type of contract in place that's written that that says, hey. This is this is what I'm doing. You know, this is like like, John, you know, you can you can you can produce this podcast. This doesn't preclude you from producing other podcasts, and you could produce this podcast whenever the heck you want to, and you work on other podcasts. So for purposes of this podcast, you're an independent contractor.
Speaker 4:But but it could go the other way if if the facts and circumstances were different.
Speaker 2:And then really just as we kinda wrap up here a little bit. So what would be your best advice to both sides of that? I I know this is kind of recapping what we already talked about. But to an employer, you know, looking to grow, you know, what would be your best advice you would give to them? But then also on the other side for an employee or a contractor kind of in discussions, say, with a potential employer, as far as for how that relationship looks with them.
Speaker 2:So two examples. Again, you know, I love two examples of everything, both sides of the fence. So kinda walk us through. Give us maybe your top couple chunks of advice for either one of those to keep them out of trouble and to keep some more money in their pocket potentially.
Speaker 5:Yeah. So I think, I think you're gonna get two situations. I think you're gonna get cut and dry situations, and you're gonna get, situations that aren't so black and white. In the cut and dry situations, you know, somebody comes on, they're clearly a w two employee, just hire them. You know?
Speaker 5:Call it a day. Move on. Right? And there's gonna be other situations where you're it's gonna be cut and dry that the person's a contractor. Right?
Speaker 5:A business owner hires me to do their taxes. I have my own business. It's cut and dry. There's no question there. Even if we sign a contract that says, you know, I'm an employee, it doesn't matter.
Speaker 5:The facts and circumstances say, in this situation, I'm a contractor. When the situation is not black and white, I kinda touched on this earlier, it's just super important to be transparent between the person hiring and the person being hired. Like Chris mentioned, the almost the only time anything comes of a misclassification case, is when there's a disagreement between, you know, the classification, and that's almost always gonna be on the side of the person being hired. Right? They disagree with how they're being classified.
Speaker 5:So if you have an upfront conversation with somebody that you're hiring about what the role is, how you're gonna pay them, that that's the absolute best advice I can give. You know, recap that that conversation in an email or in a contract. And, I would also say, don't be afraid to hire people as employees. You know, I think a few years ago, you know, five, ten years ago, that was kind of the big thing is people didn't wanna deal with it. It's not all that hard to hire employees these days.
Speaker 5:You know? You fill out an application to get an unemployment account number, sign up with a a payroll service, and, it's not all that hard. So don't let, you know, doing things the right way keep you from hiring people in your business that can help you. So that's what I'd leave you with.
Speaker 4:Hey. Excellent advice. Excellent advice. And yeah. Absolutely.
Speaker 4:Excellent advice. And for for business owners and, out there that want to expand on that and maybe have questions about employ employment classification or or general tax questions or interested in working with Jason. I know he offers a discovery call, I think fifteen or twenty minute discovery call, for for a a prospective client, making sure it's a good fit. What's the best way people should get, can get ahold of you? Yep.
Speaker 5:You can visit my website, jasonmallcpa.com. And, on my website, you can either submit a a message through the message box. My email is on there, and you can also schedule a discovery call directly on my website as well. So visit the website, and it'll tell you everything you need to know.
Speaker 2:Excellent. Their website is very clean and very user friendly. And we'll pop that link too in the show notes as well here too. So everybody who's listening to this, you do not have an excuse while you haven't clicked on that link if you have a question. So on that note too, we will also drop some links in the show notes of this podcast too for some previous podcasts related to this.
Speaker 2:I think a good one we might toss in there would be, really what qualifies as a business deduction, I think, is pretty related as well, and also some other links to some TTF resources. So thank you, gentlemen, as always, for joining us. Chris, you're stuck with me for yet another episode. You know, we'll have you back, I guess. We'll we'll let you back on your own show.
Speaker 2:But, Jason, thank you for your time as well. Thanks for having me. Appreciate it. Absolutely, everybody. And we will see everybody next week as always.
Speaker 2:Hey, everybody. John here still from the teaching tax flow team. Thank you so much, Jason, for joining us on this episode as we demystified those differences between a contractor, a ten ninety nine contractor and a w two employee. Not that ten ninety nine employee or a w two contractor. So clearly, if you listen to the show, you get my corny joke there.
Speaker 2:But as promised, look at the show notes. There's actually a link there to Jason's website. There's a link to another podcast we suggest you maybe listen to as just mentioned as well as a direct link to sign up for your free. That's right. Absolutely free membership with teaching tax flow.
Speaker 2:Click on the links below in the show notes. Take you straight there as always as well. Join that defeating taxes Facebook group. Great information. We hope to see you there.
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