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http://answers.google.com/answers/threadview?id=463647
With W-2 status, you will be an employee of the agency rather than being self employed as you are with 1099 status. The difference will be that you'll find things a bit easier tax-wise (taxes will be taken out of your paycheck and the agency will pay half of your social security tax), but you will lose your independence and the ability to negotiate your own terms.
What is the difference between an Independent Contractor and an Employee? "The difference primarily affects tax status. An independent contractor (IC) is not an employee of anyone but himself (self employed) but instead invoices and is paid by the client just as the client would pay any contractor. The client reports the payment to the IRS on a form 1099 but does not withhold taxes or pay social security tax. Other laws and regulations concerning employment, such as wage-hour (requiring overtime for certain employees) and workers compensation do not apply." "A contract employee is an employee of a temporary service agency. That agency reports the employee's earnings to the IRS on a form W-2, withholds Federal and state income tax, and pays the employer's share of the social security tax. All federal and state employment laws apply. The employee is not an employee of the client, for whom he performs his services. That client actually is a client of the temporary services agency." http://www.jashaw.com/solo/solo1.html
"Often the decision of 1099 or W2 status is based on the circumstances of the work. If you are going to work directly for a company to complete a project, and are to be paid a fixed amount for the project, then there is usually no choice but 1099 status. The company will issue a purchase order to you, you will complete the work and invoice the company. On the other hand, if you are a contract employee working through a temp agency the agency may not handle 1099 pay, or requires that you be incorporated to avoid a W-2." http://www.jashaw.com/solo/solo1.html
1099 or W-2 Which Plan is for Me? Characteristics of a W2 Employee "You work as a W2 employee when your client or an agency places you on their payroll, usually to work on a specific project. The client or agency reports your income to the IRS on a W2 form. As a W2 employee, you receive a regular paycheck from which your employer withholds all federal, state, and local taxes. You file regular state and federal tax returns, just as you would if you were a permanent employee. In most cases, the employer provides the equipment and office space you need. You may be eligible for some or all of the benefits your employer offers to permanent employees such as medical, life, and disability insurance; pension plans; sick days; paid holidays, etc." Characteristics of a 1099 Contractor "Working on a 1099 basis means that you are working as a true independent contractor under the IRS rules. You work on a 1099 basis when you are in business for yourself as a sole proprietor or as a corporation. Your clients report the money they pay you to the IRS on a 1099 form. Your clients typically contract with you to work on a specific project. You should have a written contract with each client that delineates the work you will perform, the fees the client will pay, and how the client will pay you. You will send invoices to the client in accordance with the contract terms. True independent contractors are responsible for tracking all business expenses and income and for making quarterly federal and state income tax payments." http://ework.com/WSClassification.jsp
Advantages of 1099 status: "The IC has more freedom to negotiate his terms of payment than an employee..." "The IC does not have withholding tax deducted from his pay check..." "An employer must also pay certain required benefits, such as workers compensation insurance..." Advantages of W-2 status: "Working as an employee (contract or permanent, direct) also has advantages. Taxes are taken out of each paycheck, and the employer (for a contractor, the agency) pays the employer’s half of the social security tax... For many people, this will eliminate the need to hire an accountant or lawyer to prepare the taxes (although for a family there may be other reasons to use a tax professional)." http://www.jashaw.com/solo/solo1.html
A good way to determine the differences is to have a look a the THE IRS CONTROL TEST ("an analytical tool for distinguishing employees from independent contractors").
BEHAVIORAL CONTROL "Instructions. If a company gives a worker instructions pertaining to how the work gets done rather than simply to the end product, this is evidence of an employer-employee relationship..." "Training. Ongoing training about specific methods and procedures is evidence of an employer-employee relationship." FINANCIAL CONTROL "Opportunity for profit or loss. The IRS considers the opportunity for profit or loss to be the most significant test of whether a worker maintains control over the economic aspects of his or her activities." - Significant investment. - Unreimbursed expenses. - Services available to the relevant market. RELATIONSHIP OF THE PARTIES "Intent of the Parties/Written contracts. In determining the relationship between a worker and a company, the IRS considers how the written contract describes the intent of the parties involved. - Benefits. If a company grants a worker employee benefits, such as health insurance or paid vacation time, this is evidence of employee status. - Termination. Traditionally, the terms on which either party could terminate the relationship played an important role in determining whether a worker was an independent contractor or an employee." - Ongoing Relationship. If a business and a worker enter into a relationship with the understanding that it will be permanent or indefinite, this is evidence of an employment relationship." - Regular Business Activity. If a worker performs activities or services that are "a key aspect of the regular business of the company," this is evidence of an employment relationship." http://ework.com/WSClassification.jsp
What is the difference between a Form W-2 and a Form 1099-MISC? http://www.irs.gov/faqs/faq12-2.html
1099s and Taxes "When a person is paid on the form, 1099-misc, all money earned by the individual is paid on an untaxed basis. It is then the responsibility of the individual to file and pay the appropriate taxes. These taxes can be owed to Federal, State and Local governments. Workers compensation and unemployment issues also must be addressed independently." W-2s and Taxes "When a person is paid on the form W-2, the employer automatically withholds and pays all of the necessary employee income taxes as required by the IRS. These taxes include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare). In addition, the employer will pay all of the necessary employer taxes. These taxes include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax)." http://www.topechelon.com/employers/contracting_definition.htm
Making the Jump: Moving from Permanent to Contract Employment: http://www.sage.org/resources/best.of/jump.mm
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