The difference in one paragraph
A W-2 employee works under the company’s direction, and the company withholds income tax, Social Security and Medicare from every paycheck and pays its own share on top. An independent contractor (a “1099 worker”) runs their own business: they are paid the full amount, nothing is withheld, and they pay both halves of Social Security and Medicare as self-employment tax, plus income tax, usually through quarterly payments. If this is your first 1099 job, start with our beginner’s guide to 1099 taxes.
Who pays what
| W-2 employee | 1099 contractor | |
|---|---|---|
| Social Security and Medicare | 7.65% of wages, withheld. The employer pays another 7.65%. | 15.3% of 92.35% of profit, paid by you |
| Income tax | Withheld from each paycheck | Paid by you, usually quarterly |
| Business expenses | Generally not deductible on your federal return | Deductible on Schedule C |
| QBI deduction | No | Up to 20% of qualified business income, if you qualify |
| Form you receive | W-2 | 1099-NEC or 1099-K |
The same $50,000, two ways
Here is the federal tax on $50,000 for a single filer with no other income, taking the standard deduction, first as W-2 wages and then as 1099 income with no business expenses:
| W-2 | 1099 | |
|---|---|---|
| Pay | $50,000 | $50,000 |
| Federal income tax | $3,820 | $2,667 |
| Social Security and Medicare | $3,825 | $7,065 |
| Total federal tax | $7,645 | $9,732 |
| Take-home after federal tax | $42,355 | $40,268 |
The contractor pays $2,087 more. The difference comes from Social Security and Medicare: $7,065 instead of $3,825, because the contractor also pays the half an employer would pay ($3,825 here). Income tax is lower on the 1099 side, because half of self-employment tax is deductible and the QBI deduction lowers taxable income, and that offsets part of the gap.
How much more should a 1099 job pay?
To take home the same $42,355 after federal taxes, this contractor would need about $52,800 in 1099 income, roughly 5% more than the W-2 salary. Over 2,080 working hours a year, that is $25.38 an hour instead of $24.04.
That is only the tax side. A W-2 job often comes with things a contractor must pay for or give up:
- Health insurance, often partly paid by the employer.
- Paid time off: holidays, vacation and sick days. A contractor who takes two weeks off earns nothing for those weeks.
- Retirement matching in a 401(k).
- Unemployment insurance and workers’ compensation.
- Business costs: equipment, software, insurance, mileage.
So when you compare offers, add the value of the benefits you would lose and your expected business costs to the break-even figure. Enter your own numbers in our 1099 tax calculator, which also handles a W-2 job and 1099 work together.
Employee or contractor: how the IRS decides
The job title and the contract do not decide it. The IRS looks at the whole relationship in three areas:
- Behavioral control. Does the company control, or have the right to control, what you do and how you do it?
- Financial control. Does the company control the business side of the job: how you are paid, whether expenses are reimbursed, who provides the tools?
- Type of relationship. Is there a contract, are there benefits such as insurance or vacation pay, and is the work a key part of the company’s regular business?
There is no single deciding factor. The more control the company has, the more the relationship looks like employment.
If you think you are misclassified
- Ask the IRS. You or the company can file Form SS-8 to request an official determination. The IRS says it can take at least six months.
- Pay only the employee share. If you were treated as a contractor but believe you were an employee, you can use Form 8919 to report and pay only the employee’s share of Social Security and Medicare on those wages, instead of the full self-employment tax, if you meet its conditions.
- Keep records of how the work was directed: schedules, instructions, training, who provided equipment.
Classification rules for state taxes, unemployment and labor laws can differ from the federal tax rules, so check your state’s rules too.