Financial Figures

from Valley Business FRONT, Issue 142, July 2020

FRONT Notes

W2 or 1099?

My March 2019 column talked about the Tax Cut and Jobs Act (TCJA) and what it meant to “us” as average folk. The emotions that bill evoked with 2018 tax return changes are coming back as my clients wonder about their COVID-19 “new normal.” The TCJA is now a bigger factor.

Working from home is a reality many didn’t see coming. It’ll be a more prevalent option as we move into the future. Know, though, there are financial issues for both the employee and employer.

TCJA considerations

The TCJA has changed tax benefits for employer reimbursement of employee expenses. You can no longer use the unreimbursed employee expense option on Form 2106 for Schedule A itemized deductions. What that means for most employers is, if you decide to help cover staff costs outside of the office, it’s a benefit that’s not something you can claim on your tax return.

Employers will need to shoulder additional IT expenses and other costs required for shifting employees from onsite to home office work spaces. Even if your people are working remotely, you may still need to classify staff as W-2 employees. Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.

Shifting to contract workers

This may be a good time to evaluate the relationship between employee and employer. Does it make sense to change the relationship to a 1099 from a W-2 arrangement?

This should be beneficial for both parties. Employees shouldn’t leave this decision up to the employer without knowing what actual costs will be, including the tax ramifications. If you’re an employer, spend time collecting data to help show your staffers the benefits of your proposed shift.

Done right, switching from a W-2 to a 1099 income tax filing arrangement can benefit both parties. Tax laws are complicated, though, and changing constantly. It takes smart strategies to ensure both the employee and employer prosper.

One thing an employer can do to help an employee realize maximum income potential is to offer consult with a professional advisor as a perk. I was recently able to save a client who changed from W-2 to 1099 status almost $40,000 in taxes. This applies to employers too. Understanding the right ways to set this arrangement up can save a lot. This requires pre-planning, however, so it’s important to implement the right cost saving strategies from the onset. Expert input can help you make wiser decisions.

As you explore the options for your new normal, make sure you have all the facts. Getting creative in structuring these changing arrangements - with an eye toward tax costs and benefits - makes sense for everyone.