Business Employment Types

S-Corp/LLC vs. 1099 Sole-Proprietor vs. W2 Employee

The LLC as an S-Corp — An LLC formed as an S-Corp is generally the best option for anyone owning a small business. It provides the best liability protection and the most tax benefits. The LLC prevents lawsuits or claims against you personally and limits it to the business. An S-Corp also is not taxed on it’s net income as that flows to the individual shareholder of the company.

The Sole-Proprietor with no LLC — A person being a sole-proprietor without the LLC is not a desirable business set up. This type of business entity has fewer tax deductions available as compared to an S-Corp and it is taxed at over 15% on net income. If there are any legal actions taken against the business it will include the business owner’s personal assets and make them responible for any judgements against the company.

The W2 Employee — An employee being paid as a W-2 wage earner is simplest way of being employed. You get your paycheck with taxes already taken out, put it in the bank and you’re done. However, it usually has the highest rate of taxation for income received. The 2018 Tax Cuts & Jobs Act limited and even eliminated some deductions for employees. When itemizing dedutions on the Schedule A the ‘unreimbursed employee expenses’ has been eliminated. Also, the deduction for taxes you paid for real estate taxes on your home, sales tax, and other personal taxes such as ad valorem have been limited to a combined $10,000. That leaves the W-2 employee with the least amount of write-offs to lower your taxable income by itemizing their deductions.

What to Choose — For those who are paid personally by a 1099 to their social security number we can transfer that income to your S-Corp by using the correct procedures when filing your annual tax returns. The main issue for this situation is that it still leaves the independent contractor open to personal liability. Any legal action or lawsuits related to the employment contract can be leveled against the 1099 contractor personally.

In the situation where the options are to be a W2 employee or a sole-proprietor 1099 contractor the W2 employee is going to have the least exposure to liability as long as the company statutes were adhered to. But as a W2 employee it would be best to make sure the net pay would offset the increase taxation that would not be incurred as an S-Corp contractor.