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The Green Sheet Online Edition

February 08, 2016 • Issue 16:02:01

The one man show: W-2 versus 1099

By John Tucker
1st Capital Loans LLC

Continuing the one man (or woman) show series, I'll now focus on a popular accounting-related debate that frequently comes up in professional sales circles. There's disagreement among sales professionals about which IRS status is more beneficial for our industry's feet on the street: W-2 or 1099. This article will provide insight into this often heated discussion.

Professional versus other types of sales

There are different types of sales positions. I identify the three main versions as retail agents, customer service agents and business development professionals.

Retail agents are the cashiers, car salesmen, fast food workers, etc., who sell to the customers who come into brick-and-mortar retail locations. Customer service agents handle inbound calls from customers who want to learn more about services and products.

Business development professionals are responsible for selling complex solutions that address complex problems. This usually involves longer sales cycles and higher stakes if a product fails. This type of sales also requires innovation when identifying and communicating with prospective clients.

As a merchant level salesperson, you are engaged in business development. Bringing in new customers, selling products to them and maintaining profitable relationships with them are expected to bring in top-line revenue and comprise the foundation of an ISO.

Understanding the importance of the business development role, does it make sense to be an employee who is compensated on a W-2 basis, or does it make sense to be an independent contractor whose earnings are reported on IRS form1099? If the variables are the same – for example, operational costs, compliance, and access to the same markets and products – why not work as an independent contractor? After all, your payout will be higher.

Base pay is a phantom

In professional sales, some believe that a base pay and the benefits package of insurance, retirement planning, expense reimbursement and bonuses, provide necessary structure and justify choosing a W-2 position over a 1099 one. The truth is that all of the payments and benefits you receive as an employee are coming from your sales production and are merely "draws" or "free loans" against said future production.

This explains why organizations set particular quotas for sales employees on a weekly or monthly basis. And if you aren't hitting the established level of production, they can quickly terminate you or claw back compensation already paid, and replace you with someone capable of hitting the production level required.

Compensation comparisons

Over time, the sales professional operating on 1099 should out earn the one operating on W-2, because the independent contractor will receive a much higher revenue share on production volumes. I'll compare the compensation for the same level of production for an independent contractor versus an employee.

First, here are the factors the two hypothetical situations have in common:

  • Over a 12-month period, both reps sign up 100 new merchants on a five-year contract term.
  • All 100 merchants are signed up with a new POS system.
  • The POS systems are financed with a $100 a month plan for 60 months/five years for a total of $6,000.
  • The processing pricing comes out to a 30 basis point markup of interchange.
  • The merchants on average process $400,000 a year in processing volume.
  • Other fees include a $12 monthly statement fee and a $200 annual POS servicing fee.

Based on these numbers, the revenues created off of the 100 merchants include the following (these numbers do not include the cost of marketing, administration and other operational expenses):

  • $600,000 over five years from the sale of the 100 POS systems on the 60-month financing plan.
  • $600,000 over five years ($120,000 per year) for the basis point markup of interchange alone.
  • $1,720 over five years from the annual and statement fees.

Let's say the 1099 agent receives a 65/35 split on revenue share. This turns out to be $390,000 from the basis point markup of interchange alone over five years, without adding revenues from the transaction fees.

For the sale of the POS systems, let's say the 1099 agent receives $1,500 upfront for each system sold. This comes out to $150,000. Finally, based on usual Schedule A patterns, the agent would likely get about 50 percent of the annual and statement fees, which comes out to $860 over a five-year period. This is a total of more $540,000, with a good chunk of this compensation being paid out in year one, and the rest paid out over the next four years.

In contrast, an employee (W-2) might receive a salary of $60,000 to $80,000 with a benefits package that includes insurance, time off for holidays, sick days, vacations, a company car, Social Security contribution payments, and 401(k) matches that equate to a value of $30,000. Finally, a bonus might be paid of, say, $25,000 to $40,000. This would bring the employee's total compensation package to $115,000 to $150,000 that year – with no further compensation for those accounts – compared with more than $540,000 paid out over five years to the 1099 agent.

Thus, if an employee became an independent contractor and achieved the same production, he or she would make significantly more money. Granted, each W-2 agreement is different, as some companies pay employees residuals, but if they are laid off, their residuals are usually gone, too.

The best opportunity

In general, the 1099 structure offers the best opportunity for sales professionals. It's pretty simple for an independent contractor to set up his or her own private insurance policies, and the "company car" can just be your current vehicle, as you are allowed to deduct costs related to the commercial use of your vehicle on your tax return.

For "draws" or "loans" against future production, independent contractors can open up credit lines and take advantage of promo specials offering 0 percent interest for 12 to 18 months, with, say, a 2 percent upfront fee. My favorite credit cards for this include the QuickSilver Rewards Card and the Discover IT Card, among others. end of article

John Tucker is Managing Member of 1st Capital Loans LLC, as well as an M.B.A. graduate and holder of three bachelor's degrees in accounting, business management and journalism. Tucker has nearly nine years of professional experience in commercial finance and business development. You can contact him by email at tucker@1stcapitalloans.com or by telephone at 586-480-2140.

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