Sole Proprietor, W-2 and 1099: Psychotherapy Practice Employment Options

Sole Proprietor

1. Business Ownership:

   • Owner: The sole proprietor owns and operates their own business.

   • Control: They have full control over business decisions, operations, and profits.

2. Tax Obligations:

   • Self-Employment Taxes: Sole proprietors are responsible for paying self-employment taxes, which include Social Security and Medicare taxes.

   • Business Expenses: They can deduct business expenses directly from their income to reduce taxable income.

   • Tax Forms: They file taxes using Schedule C (Profit or Loss from Business) along with their personal tax return (Form 1040).

3. Liability:

   • Personal Liability: Sole proprietors have unlimited personal liability for business debts and obligations, meaning personal assets can be used to satisfy business liabilities.

4. Income:

   • Revenue: Income is derived from business profits after expenses are deducted.

5. Regulations:

   • Fewer Formalities: Typically, there are fewer regulatory requirements and formalities compared to other business structures like corporations.

W-2 Wage Earner

1. Employment Relationship:

   • Employee: A W-2 wage earner is an employee of a company or organization.

   • Control: They work under the direction and control of their employer, following set work hours and job duties.

2. Tax Obligations:

   • Withholding: Taxes are withheld from their paycheck by the employer, including federal income tax, Social Security, and Medicare taxes.

   • Tax Forms: Employees receive a W-2 form from their employer at the end of the year, summarizing their earnings and the amount of taxes withheld.

3. Liability:

   • Limited Liability: Employees are generally not personally liable for the business’s debts and obligations.

4. Income:

   • Salary/Wages: Income is in the form of wages or salary, which is usually consistent and predetermined.

   • Benefits: Often receive benefits such as health insurance, retirement plans, and paid leave, which are provided by the employer.

5. Regulations:

   • More Formalities: Employment is governed by labor laws and regulations, including minimum wage laws, overtime pay, and workplace safety standards.

1099 Worker (Independent Contractor)

1. Employment Relationship:

   • Independent Contractor: A 1099 worker is an independent contractor who provides services to clients or businesses on a contract basis.

   • Control: They typically have more control over how, when, and where they work compared to W-2 employees.

2. Tax Obligations:

   • Self-Employment Taxes: Like sole proprietors, 1099 workers are responsible for paying self-employment taxes (Social Security and Medicare taxes).

   • Business Expenses: They can deduct business expenses from their income to reduce taxable income.

   • Tax Forms: They receive a 1099-NEC form from each client or business that paid them $600 or more during the year and report this income on their tax return.

3. Liability:

   • Personal Liability: Independent contractors can also be personally liable for business-related debts and obligations, though they may mitigate this through contracts and business insurance.

4. Income:

   • Contract Payments: Income is derived from payments for services rendered, which can vary based on contracts and client agreements.

5. Regulations:

   • Less Formality: Independent contractors have fewer regulatory constraints compared to W-2 employees but must comply with contract law and industry-specific regulations.

Summary

• Sole Proprietor: Owns and runs their own business, controls business decisions, pays self-employment taxes, bears personal liability for business debts, and earns income from business profits.

• W-2 Wage Earner: Works as an employee, follows employer's direction, has taxes withheld by the employer, enjoys limited liability, and earns a steady salary with potential benefits.

• 1099 Worker: Provides services as an independent contractor, controls their work arrangements, pays self-employment taxes, can deduct business expenses, bears personal liability for business debts, and earns income from contract payments.

Understanding these distinctions helps in making informed decisions about employment and business arrangements.

DISCLAIMER and PURPOSE: This discussion document is intended for training, education, and research purposes only. The information contained herein is based on the data and perspectives available at the time of writing. It is subject to revision as new information and viewpoints emerge.

For more information see: https://www.mentorresearch.org/disclaimer-and-purpose