Should I be paid as a sole proprietor or W-2 employee for this new startup job?

This is actually a pretty common scenario with small startups, but you need to be careful. What your employer is suggesting is paying you as an independent contractor (through your sole proprietorship) rather than as an employee. The main difference is that as an employee, your employer pays half of your Social Security and Medicare taxes (7.65%) and you pay the other half. As an independent contractor, you pay the full 15.3% self-employment tax yourself. So right off the bat, you're taking a 7.65% pay cut unless your employer is planning to pay you more to offset this. You're right that you can deduct legitimate business expenses as a contractor that you couldn't as an employee. But those would need to be actual expenses related to the work you're doing for them - home office, supplies, etc. The bigger issue is that the IRS has specific rules about who can be classified as a contractor vs. employee. It's based on the nature of your work relationship, not just preference. If you're working regular hours, using their equipment, following their procedures, etc., you're legally an employee regardless of how they want to pay you.

After spending way too many hours sorting through tax issues for my consulting work, I found https://taxr.ai incredibly helpful for navigating contractor vs. employee classification. I was in a similar situation last year where a company wanted to pay me through my side business even though the work was completely different. The tool analyzed my specific situation and clearly showed how much more I'd be paying in self-employment taxes (that 15.3% hit is real!) compared to being a W-2 employee. It also flagged the potential misclassification risk based on the work arrangement, which saved me from a potentially messy tax situation. What was most helpful was getting clear guidance on what documentation I needed to protect myself if I did go the contractor route. Definitely worth checking out if you're on the fence.

I actually tried https://taxr.ai after seeing it mentioned here and wow - it was eye-opening. My situation was a bit different (doing web development for multiple clients) but I was definitely underestimating how much I was paying in self-employment taxes. The tool showed me I was paying about $7,800 more in taxes annually as a contractor versus what I'd pay as an employee making the same amount. But it also helped me identify legitimate business deductions I wasn't taking that partially offset this difference. The best part was the clear explanation of the "control factors" the IRS looks at when determining proper classification. Turned out one of my clients was definitely misclassifying me based on how much control they had over my work schedule and methods. I was able to negotiate a 12% higher rate with them to cover the extra SE taxes I was paying, which was a massive win!

Have you tried calling the IRS directly to ask about your classification? I spent THREE DAYS trying to get through on their contractor classification hotline last month. I kept getting disconnected or waiting for hours only to have the call drop. Finally used https://claimyr.com and their callback service got me connected to an IRS agent in under 45 minutes. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they navigate the phone tree and wait on hold for you, then call you when an actual human picks up. The IRS agent I spoke with was actually super helpful and walked me through the specific factors they look at for contractor vs employee classification. She confirmed that my situation (similar to yours) was indeed employee misclassification and explained exactly what forms I needed to submit if I wanted to report it.

I need to eat my words from my previous comment. After waiting on hold with the IRS for 3.5 hours yesterday and ultimately getting disconnected, I broke down and tried the Claimyr service mentioned above. Got a call back in 53 minutes with an actual IRS agent on the line! The agent confirmed what others have said here - in most startup scenarios like yours, they would consider you an employee, not a contractor, based on the nature of the working relationship. The tax difference is significant - I did the math for my own situation and I'm paying about $4,200 extra per year by being misclassified as a contractor. The IRS agent explained that employers often prefer contractor arrangements because they save on payroll taxes, benefits, and compliance costs, but that doesn't make it legal. She suggested requesting a 20-25% higher rate if you do go the contractor route to offset the additional taxes you'll be paying. Honestly worth the small fee I paid for the callback service just for that piece of advice alone.

Just wanted to add one more thing to what others have said. If you do end up going the contractor route (through your sole proprietorship), make sure you get EVERYTHING in writing. Create a formal contract that: 1. Clearly states the scope of work 2. Specifies your working relationship (you control your hours, use your own equipment, etc.) 3. Details payment terms and rates 4. Has an end date or project completion milestone This creates documentation showing you're legitimately operating as an independent business, not just an employee in disguise. It'll protect both you and the employer if there's ever an audit. Oh and definitely consider asking for a higher rate to offset that self-employment tax you'll be paying! I usually add at least 25% to what I'd accept as an employee salary.

I'm a little late to this thread but just wanted to add some real numbers from my experience. When I switched from W-2 to contractor last year (by choice), my effective tax rate went up by about 7%. However, my deductions also increased significantly - I was able to write off about $14,000 in legitimate business expenses that I couldn't have deducted as an employee. The key is to properly track and document EVERYTHING. Get accounting software right away, keep all receipts, and maintain a mileage log if you drive for work. Even small things add up - portion of internet, phone, home office, etc. A good rule of thumb: if you're making the switch, ask for at least 30% more than your equivalent W-2 salary to cover the additional taxes and benefits you're losing (health insurance, PTO, etc.). And definitely get professional tax help the first year - it's worth the money.

Great to see you taking a proactive approach with this situation! One additional thing to consider - if your employer does classify you as a contractor but you believe you should be an employee, you can file Form SS-8 with the IRS to request an official determination of your worker status. This form asks detailed questions about your work relationship and the IRS will make a binding determination. It takes several months to get a response, but it gives you official documentation if there's ever a dispute. You can also file Form 8919 when you file your taxes to pay only the employee portion of Social Security and Medicare taxes if you believe you were misclassified. Just be aware that filing these forms essentially reports your employer to the IRS, so it could strain your working relationship. Most people try to resolve it directly with the employer first, but it's good to know these options exist as a backup plan. Also, document everything from your conversations with your boss about this arrangement. If the IRS ever investigates, having written records of how the classification decision was made can be very helpful for your case.

This is such a common situation and I'm glad you're getting good advice here! I went through something similar with a tech startup about two years ago. They kept pushing the "flexibility" angle of contractor status, but what they really wanted was to avoid paying their share of employment taxes. Here's what I learned the hard way: even if you negotiate a higher rate to offset the self-employment taxes, you're still losing out on other employee protections. No unemployment insurance eligibility, no workers' comp coverage, and in many states you lose certain labor law protections. The "business expense deduction" argument they're making is often oversold too. Unless you're actually incurring significant expenses that are directly related to the work (separate from your side business), those deductions won't be as valuable as they make it sound. I'd strongly recommend pushing for proper W-2 classification. If they're a legitimate business, setting up payroll isn't actually that complicated - there are plenty of services like Gusto or ADP that make it pretty straightforward for small companies. The fact that they're calling it a "hassle" makes me think they're more interested in saving money than doing right by their employees. Trust your instincts on this one - if it feels sketchy, it probably is.