Whether you should pay yourself as a 1099 independent contractor or as a W-2 employee from your LLC depends on various factors, including your role within the company, your tax situation, and your preferences.

Here are some considerations to help you decide…

Paying Yourself as a 1099 Independent Contractor

Pros

1. Tax Flexibility – As a 1099 contractor, you have more flexibility in managing your taxes, including potential deductions and the ability to pay estimated taxes quarterly.
2. Simplified Payroll – Employing yourself as a contractor may simplify payroll processes for your LLC, as you won’t need to withhold payroll taxes or provide employee benefits.
3. Control Over Finances – Contractors have more control over their income and expenses, allowing for greater flexibility in managing personal finances.

Cons

1. Self-Employment Taxes – As a contractor, you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes (15.3% as of 2022), which can result in higher tax liability.
2. No Employee Benefits – Contractors don’t receive benefits typically offered to W-2 employees, such as health insurance, retirement contributions, or paid time off.
3. Limited Legal Protections – Independent contractors may have fewer legal protections and benefits compared to employees, such as unemployment insurance or workers’ compensation.

Paying Yourself as a W-2 Employee

Pros

1. Stability and Benefits – W-2 employees typically receive benefits such as health insurance, retirement contributions, and paid time off, providing financial stability and security.
2. Employer Contributions – Your LLC can contribute to your Social Security and Medicare taxes as an employer, potentially reducing your overall tax burden.
3. Legal Protections – W-2 employees are entitled to certain legal protections and benefits, such as workers’ compensation and unemployment insurance.

Cons

1. Payroll Compliance – Employing yourself as a W-2 employee involves additional payroll compliance requirements, such as withholding payroll taxes, filing payroll tax returns, and providing employee benefits.
2. Less Tax Flexibility – W-2 employees have less flexibility in managing their taxes compared to contractors, as taxes are withheld from their paychecks automatically.
3. Administrative Burden – Managing payroll for W-2 employees may require additional administrative effort and resources, such as payroll software or outsourcing services.

Considerations

• Tax Impact – Evaluate the tax implications of both options based on your income level, deductions, and overall tax situation.
• Legal and Compliance Requirements – Consider the legal and compliance obligations associated with each option, including payroll tax withholding, reporting, and employee benefits.
• Personal Preferences – Assess your personal preferences, financial goals, and risk tolerance when deciding between being a contractor or an employee.

The best approach for paying yourself from your LLC depends on your individual circumstances, preferences, and long-term goals. Consulting with a qualified tax advisor, accountant, or legal professional can help you make an informed decision and ensure compliance with relevant laws and regulations.