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Understanding Employment Tax Forms: Are you a W2, 1099 or both? 

Understanding Employment Tax Forms Are You A W2, 1099 Or Both

This is the fourth post from our series The HorseGrooms’ Guide to Finance with Emmy Sobieski, CFA. Emmy Sobieski breaks down the gibberish of tax forms and explains the benefits to creating an LLC.

1. How to know if you are an employee and should get a W2

Are you all employment, income, time spent with one employer, with no side gigs like braiding or clipping? Do you have a contract and health insurance through that employer? Then that’s a full-time job, and you should receive a W2. 

However, if your employer wants to give you a 1099, check with your tax advisor, but that is more their risk than yours.  

A W2 is a tax form for a company to declare what they paid a full-time employee. With a W2 comes more responsibility for the company to pay payroll tax and other government taxes, so often they would rather give you a 1099 if they can. And this may benefit you.

A 1099 is a tax form for someone (person or company) to declare what they paid another person who is NOT a full-time employee, for business services. 

If you are getting 1099s then it will make sense to take the income into an LLC rather than directly to you, because with an LLC, it is your own business (single member LLC), and you can deduct more for your business than you can individually.

2. Form an LLC if you have side gigs like clipping/braiding for others

You can deduct expenses more than on personal tax returns, and depending on how many hours you work for each employer, most should be able to pay you through your LLC and generate 1099s not W2s. To see how to apply this to your specific situation, do further research into the topic of what it means to be a contractor (thus get issued a 1099 and charge clients through your LLC) versus a full time employee (W2).

Why does it matter if you are getting 1099s or a W2?  

In the last few years, the IRS decreased the number of personal deductions you can take on your taxes. This means that having a side gig (clipping, braiding, etc.) and making it official (creating an LLC, called a Limited Liability Company) could enable you to take relevant deductions that are real costs to running your business. If you have a W2, you might not be able to take these same deductions. Additionally, your income tax rate may be lower using an LLC and receiving 1099s, thus giving you a double benefit. 

Employment Tax Forms W2 1099

And, you don’t have to create the LLC in the state that you are working in.  

Florida and Wyoming have a smooth process for creating LLCs. DON’T waste money paying Legal Zoom or other service to set it up. And beware! Once you set it up, you may get random emails saying you have to pay for various services. These are scams, as you can do it all yourself. 

I do it myself and find it quite easy.

Just go to the government website (Wyoming’s is particularly easy, and they answer the phone and are super helpful). Wyoming is aiming to regain their No. 1 status in LLC creations above Delaware (which Delaware won away from Wyoming), so they are extra friendly.

Once you have your LLC, then your side gig earnings–i.e. clipping, braiding and night checks for clients other than your employer–all should be paid to your LLC.  Then you can deduct your car, gas, and other expenses as expenses of the LLC. You will have a separate part of your taxes for your LLC.

If you work for several barns and don’t receive a W2, i.e. all employers give you a 1099 and don’t count you as an official employee, then ALL your income can come through your LLC, where you will pay the same income tax rate as if you took the money individually, but you can deduct more expenses because it is a business.

Some people create an S-Corp but most use an LLC. Do your own research and talk to your tax advisor to find what works for you.

3. You can have a W2 and an LLC

Even if your employer gives you a W2, and you are a full time groom, you may want to form a single member LLC for any money you make outside of your main employment.

This might be clipping services, braiding for other barns, or even creating a cool app for grooms like this one!  See No. 2 above for the benefits of creating an LLC.

You CAN have both a W2 and LLC.  In fact, some people have multiple LLCs, but I don’t recommend doing that without good sound reasoning as it complicates your taxes and life.  

Keep it as simple as possible while thinking in after-tax dollars!

This is NOT a financial, legal, tax, or investment advice.

This article is for educational purposes only. It is not advice. Why isn’t it advice?  First, I don’t have the licenses necessary to advise you. Second, I don’t know your specific situation, which I would need to know in order to advise you (if I had the licenses, which I do not).  

Whenever someone gives you advice, ask yourself these two questions above: do they have the credentials, and do they know your specifics? If either answer is no, treat their advice like a starting point of learning, and not as advice.

Let these blogs serve as a starting point in your education, not an end answer. Only you can find your answers to your specific situation.

August 17, 2023

Emmy Sobieski 🇺🇸

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