{4 minutes to read}  I'm going to share with you a question that a client sent to me last week in an email. It's a question that I believe a lot of small business owners have. I answered her, but as I was doing, so I realized that this is something I wanted to share with any small business owner that may have a similar question. This person is a professional and owns a professional services LLC. She provides project management services to other companies.

The question was this: there was another company that was interested in the services provided by her LLC, but they really were interested in hiring her — and this is the terminology they used — as a W-2. She asked me — Should I go into a W-2 contract or a 1099 contract?

The way I responded to her was this. The terms W-2 and 1099 aren't types of contracts. Those are the numbers of tax forms that are filed with the IRS by someone who has hired someone, either as an independent contractor or as an employee. A person who is hired as an employee is subject to tax withholding and employment taxes, and the W-2 is the form that the employer files with the IRS to report wages paid to that person, withholding, and taxes. An individual can be an employee, but an LLC cannot be an employee.

In this situation, my client is the sole owner of an LLC. She formed the LLC in order to do business with other companies. And so certainly that LLC cannot be an employee of another business. Her LLC could enter into a contract with the other business, and if that is the case, her company would be an independent contractor and the other company would file a form 1099 with the IRS to show the amount of fees paid to her company under that contract.

She then said — Well, can I just be an employee of this other company and run my own LLC? And I said, yes, she can certainly do that so long as there's no conflict of interest. But what that would mean would be that she's an employee, but she's also a small business owner, and self-employed at the same time. It could get a little complicated tax-wise just trying to figure out what she's doing at any given point in time. But certainly, that's a possibility if the other company that wanted to hire her only wanted to hire her as an employee. And there are reasons why a company may have that position. 

So, the long and the short of it is that these questions are so very important, and you should get the answer before you or your business enters into a contract with another business, because the type of contract that is entered into can significantly affect a lot of things — your tax filing, potential conflicts, competition, etc.

If you have a question, please give us a call, or contact us. And as always, like this video, and subscribe to our channel so that you can get further videos that hopefully provide helpful tips for running your business.