I'm a freelance writer and editor, and I do some seasonal, part-time work for a small business. During her busy season, I go into her office twice a week and charge a rate for the hours I edit. I also do work for her out of my own office on days I am not in her office. Her accountant is advising her to give me a W-2 instead of a 1099, treating me as a part-time employee. If I am classified as an employee -- even if it's part-time, seasonal, and there is no set number of hours per week -- will I lose some of the tax write-offs I get as a self-employed person?
The general response to this is yes: unreimbursed employee business expenses were subject to 2 percent of adjusted gross income and are no longer deductible for 2018. The reason why the accountant is recommending this is because her business will likely get a 20 percent qualified business income deduction by increasing wages and reducing subcontractor costs, as wages are a part of the calculation when income exceeds certain levels.
I would look to see if you are, in fact, an employee. The determination is based on facts and circumstances of three categories. Those categories are behavioral control, financial control, and relationship. If this is your only customer, and she determines your hours, the accountant may have a point. If you are an employee, you may ask what the expense reimbursement policy is (mileage, travel, marketing, etc.). Although not authority, the IRS’s website is a good place to start in consideration if you are an employee or not.
If you are classified an employee, it may be time to open negotiation with your employer. Here are several points to consider:
- Negotiate a higher hourly rate.
- See if any of the expenses you had been deducting are reimbursable by the employer under your employment agreement of company policy.
- See if the cash flow is the same as an employee with no business expenses versus a Schedule C that is paying both the employee and employer payroll expenses. Here are some examples:
- If you had minimum expenses, it may be an easier discussion. You may currently have $1,600 of expenses, but are only getting a benefit of $1,600 on the employer portion of employment taxes, which may net to $0.
- (A better example) If your Schedule C reported taxable income of $25,000 (and assume this is your taxable income) and your tax rate was 15 percent, you would be paying self-employment taxes at 15.53 percent, or $3,882.50 (15.53 percent on 25,000). As an employee you would get a deduction for the payroll tax (employer piece) of $1,941.25 ($3,882.50/2). The benefit from those payments would be at your tax rate or 15 percent in this example, or $291.88. The net cost to you would be $1,649.37 (actual cash outlay). So, by becoming an employee, you would be saving $1,649.37 on self-employment taxes as the employer would now be paying those. If your expenses were close to that number, then the net result of becoming an employee would be minimal.
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Answered by: Ryan P. Hintenach, CPA, is a manager with Concannon, Miller & Co. PC in Bethlehem, Pa.