Is it better to be a W-2 payroll clerk or a 1099 self-employed worker?

Hello and welcome to Financial Face-off, a MarketWatch column where we help you weigh financial decisions. Our columnist will give her verdict. Tell us in the comments if she’s right. And please let us know your suggestions for future Financial Face-off columns.

Whether you call it the Great Resignation, the Great Renegotiation, or the Great Resistance, people (who can afford it) are rethinking the role of work in their lives.

For more and more, this means giving up the job in the company and becoming self-employed as a freelancer. At the end of 2021, the number of workers identifying as self-employed (9.3 million) had increased by 8% compared to the beginning of 2020, corresponding the outplacement services company Challenger Gray & Christmas.

So which is the better financial choice: being an employee or being self-employed?

(By the way, “W-2” and “1099” in this column refer to tax forms. A payroll clerk receives a W-2 form at the end of the year detailing his wages and the taxes withheld by his employer; a freelancer , Independent contractors or small business owners typically receive a 1099 detailing the payments received.)

Why it matters

People are looking for flexibility at work, and self-employment can be a step towards that goal.

Aside from giving you more control over your schedule, self-employment can also bring financial benefits. Companies often pay independent contractors higher wages than their W-2 counterparts. Self-employed people who work from home may qualify for the home office tax deduction, meaning they can deduct certain expenses such as rent/mortgage payments, utilities and insurance. They can claim a mileage deduction if they drive to work and they may be eligible for some other tax deductions related to being a business owner.

But if you’re self-employed, you’re responsible for the overheads that the employer pays for—costs that, as a W-2er, it’s easy for you to forget.

For example, you must withhold your own payroll taxes. You also need to take care of the other benefits that employers provide. That means setting up and paying into your own retirement account and—this is a big problem—paying for your own health insurance. You will also need to find and pay for your own disability insurance and possibly liability insurance. You must file self-employment taxes quarterly.

“Sure, 1099 people get more flexibility. But I’m not sure it’s worth it,” said Shelly-Ann Eweka, senior director of financial planning strategy at TIAA. “It’s important to note that 1099 workers should negotiate a higher income to cover all of these additional costs — from benefits and taxes to retirement plans.”

Depending on which state they are in, the self-employed may not enjoy the same legal protections as employees, such as B. Overtime pay and meal breaks. You will not get paid vacation, parental leave or sick leave.

Another lesser-known problem: The self-employed can face hurdles when applying for a mortgage, says Rick J. Nott, senior wealth advisor at LourdMurray in Los Angeles. “Honestly, mortgage rules are pretty old-fashioned,” Nott wrote in an email to MarketWatch. “Not having a steady W-2 income can make the mortgage process very difficult and in some cases unattainable (even if the total gross pay is the same!)”

Another factor to consider is what stage of your career you’re at, Nott noted. “As a consultant, I have a lot of what I learned from other people personally and spontaneously early in my career,” added Nott. “Especially early in your career, there’s something about Facetime that could allow you to win opportunities that aren’t available to someone remote. As the saying goes, “Showing up is half the battle.”

The judgment

W-2 payroll clerk

my reasons

I’m generally risk averse, so the potential financial benefits of self-employment (like the tax deductions mentioned above) don’t outweigh the value of a regularly scheduled paycheck to me. The less income volatility you have, the easier it is to create a financial plan and chart a path to achieving goals.

It’s also possible that when we’re our own bosses, it becomes more difficult to establish healthy boundaries between work and the rest of our lives (Happy Birthday to fans of HBO’s Severance). A friend recently told me they were trying to “decouple” their self-esteem from their job, and the comment made me think of that financial face-off.

“Freelance work can be stressful and emotionally draining for many people,” said Ben Henry-Moreland, a board-certified financial planner and founder of Freelance Financial Planning in Omaha, NE.

“The cliché ‘If you do what you love, you don’t have to work a day in your life’ is being turned on its head and is more like ‘If you’re doing what you love, you’ll be stuck with it forever and ever.’ never stop.’ If you don’t draw real boundaries between your work and your personal life, it can be very difficult to feel like it’s okay to quit work when pay depends on the project getting completed.”

Is my judgment best for you?

On the other hand, it’s worth noting that being a freelancer doesn’t necessarily mean living hand-to-mouth, says Henry-Moreland. “I think there’s a notion that freelancers’ income is inherently unstable or underpaid compared to W-2, which isn’t true at all,” Henry-Morleand said. “Many self-employed people do very well when they are able to find a valuable niche for themselves and to communicate the value of their work.”

Another myth to bust: the stereotype that “to freelance you have to be an outgoing, up-and-coming #hustle guy,” Henry-Moreland said. In fact, “many different personality types can thrive in self-employment.”

Jared Hoole, a CFP and president of Lakeside Financial Planning based in Burlington, Mass., says being self-employed gives him the flexibility to be with his family. He sees a great advantage in this: “You have the opportunity to determine your own fate.”

As a freelancer, you don’t have to deal with office politics or a boss standing in your way, he said. “I think everyone’s had at least one boss they didn’t care about in their career, so I think not being accountable to anyone else is a huge benefit,” Hoole said.

Hoole made the transition from a payroll clerk thanks in part to his supportive wife, and he recommends it to others, with the big caveat that it helps a lot if your partner is a W-2 employee with steady paychecks to add to theirs Health insurance. “To some extent, the stars have to align,” Hoole said. “If you don’t have other people in your life to support you, it would be very difficult to go out on your own.”

Another timely point is that the boom in remote work has negated some of the reasons people might seek self-employment, Henry-Moreland noted.

Many people see self-employment as an opportunity to have more choices about when, where and how they work, he said. But “as more companies have embraced remote work and flexible schedules, the difference between freelance and traditional employment in this regard is much smaller today than it was a few years ago, and many people would have had to freelance work to fit a non-traditional schedule, have more options now.”

Tell us in the comments which option should win in this financial duel. If you have ideas for future Financial Face-off columns, email me. Is it better to be a W-2 payroll clerk or a 1099 self-employed worker?

Brian Lowry

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