My friend and client, Bill Lyons, asked the following question as a comment to my blog on Year End Tax Planning.

“Our mortgage team just got picked up by a federal charter. We are really excited about this move as we are now in all 50 states and have the backing of a bank.
However some of the team is concerned b/c under CA law if they have a real estate license they can act as an independent contractor and be paid 1099. The OTS and HUD/FHA requires all agents of the bank to be W2 employees. Not to mention potential legislation coming down on moving the entire mortgage industry that way. Can you explain the difference in terms of tax ramifications of 1099 vs W2?
I think a lot of people think that if they get a check in full without taxes being taken out that they are in essense making more money and are saving money on taxes.

Bill’s right – this is a very confusing area of the law for most people. Without proper planning, it is very expensive to receive your income on a 1099. Not only do you have to pay income tax on the 1099 income (and with no withholding, you need to be sure to set aside money for your quarterly estimated tax payments), income received for services reported on a 1099 is subject to self-employment tax (Social Security tax) on the full amount. On the other hand, if you are a W-2 employee, you pay ½ of the Social Security tax and your employer pays the other half. So you are really receiving a benefit by being a W-2 employee.

With proper planning, there are some advantages to receiving income as an independent contractor under a 1099. For more information, I suggest you register for our School of Tax Strategy Accelerated Winter Course that will only be offered until December 20th. Join our School of Tax Strategy now and receive over $21,000 of Strategic Tax Consulting for only $997. Register at http://www.provisionwealth.com/products.

Save taxes now through proper knowledge and planning.

Warmest regards,

Tom