(W-2) Freelancing - Be careful how you cast!

It is becoming ever more popular for agencies to insist on your being paid as a W-2 rather than a 1099. Does it matter? Oh, yeah! 

Sure, it's just a project. 3-months. 6-months, so evern though you're receiving a W-2, you're not really an employee, right? Wrong. The situation is temporary, but that just means you're a temporary employee. As far as the IRS is concerned, if you receive a W-2 you are an employee. There are 'test' scenarios to determine if you are really a contractor when receiving a 1099, but when you're being paid via W-2, the guessing has been removed.

So, what does this mean to you? It's a good thing to have the taxes withheld...it means you don't have to do the quarterly estimate payments thing, and don't have to worry about coming up short at the end of the year because you forgot that business share of FICA isn't reduced by your personal deductions. There are pitfalls, though.

If you are receiving a W-2, you could most or all of your home-office deductions during that period. In fact, you could also lose the ability to write off your vehicle expense. Why? Because driving to work is not tax deductible like driving to a client. If the W-2 is coming from the agency, try to get something in writing from them that acknowledges that your home is your office. Given that, you may be able to treat the travel to and from the client as an unreimbursed employee expense on your tax return. Otherwise, if the agency's office is in the same direction as the client's, the IRS could say you are only allowed to deduct the cost of travel between the agency and the client. Worse, if you will be receiving the W-2 direct from the client, then you're probably out of luck...their office becomes your office, and travel to and fro is on your nickel. W-2 projects often come 'with benefits' as well, but what does that really mean to you if the project is short-term?

Another thing to keep in mind is that, technically, any time you are working via a W-2, that work becomes something that needs to be identified on job appications, credit applications and in your resume as a previous employer.

Speak to your accountant so that you understand the full picture before accepting payment via W-2.