Taxes
W-2 vs 1099: how being an employee or contractor changes your taxes
Two offers can promise the same $20 an hour and leave you with very different amounts after tax, depending on one detail: whether you are paid on a W-2 as an employee or on a 1099 as an independent contractor. Knowing the difference before you accept is worth more than any tax trick afterwards.
Tax figures on this page are for the 2026 tax year.
Two kinds of workers
A W-2 employee works for a business that withholds income tax, Social Security and Medicare from each paycheck and sends the money to the government. In January the employer sends a Form W-2 summarising the year.
An independent contractor, freelancer or many gig workers are paid in full with nothing withheld. Clients and platforms may send a Form 1099 showing what they paid. You are responsible for setting aside and paying your own taxes, and you can deduct ordinary and necessary business expenses.
The tax that surprises people: self-employment tax
Social Security and Medicare are paid on both kinds of work, but split differently.
- As an employee, you pay 6.2% for Social Security and 1.45% for Medicare, a total of 7.65% of wages, and your employer pays a matching 7.65% that you never see.
- As a self-employed person, you pay both halves yourself through self-employment tax. The IRS sets the rate at 15.3%: 12.4% for Social Security and 2.9% for Medicare.
For the 2026 tax year, the Social Security part applies to the first $184,500 of combined wages and self-employment earnings; the Medicare part has no cap. Higher earners can also owe a 0.9% Additional Medicare Tax above a threshold.
Working out self-employment tax
The IRS method has three steps:
- Start with your net profit: what clients paid you minus business expenses.
- Multiply by 92.35% to get the earnings subject to self-employment tax. This step mirrors the fact that employers can deduct their half.
- Multiply by 15.3% (while under the Social Security wage base).
You can then deduct half of the self-employment tax when figuring your income tax.
Self-employment tax calculator
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Comparing a W-2 offer with a 1099 offer
Because of the extra half of Social Security and Medicare, plus missing benefits such as employer health contributions, paid time off and retirement matches, a 1099 rate usually needs to be noticeably higher than a W-2 rate to come out even. When comparing:
| Line | W-2 job | 1099 contract |
|---|---|---|
| Social Security and Medicare | 7.65% of wages, withheld | About 15.3% of 92.35% of net profit, paid by you |
| Income tax | Withheld each paycheck | You set aside and may pay quarterly |
| Business expenses | Generally not deductible for employees | Deductible against 1099 income |
| Benefits | Often health, retirement match, paid leave | Usually none; you buy your own |
| Unemployment insurance | Usually covered | Usually not covered |
A set-aside plan for 1099 income
Open a separate savings account just for taxes. Every time a 1099 payment arrives, move a share of it there straight away, before you spend any of it. The right share depends on your total income, deductions and state taxes, so check it against your actual tax return after your first year, and adjust.
If you expect to owe $1,000 or more for the year after withholding and credits, the IRS generally expects estimated tax payments during the year, usually in four installments. If you also have a W-2 job, you can instead increase withholding on your W-4 to cover the tax on your side income.
W-2 or 1099 checklist
Tick items as you go. Ticks stay on this page only and clear when you leave.
Questions people ask
Do I have to pay taxes on 1099 income if I did not get a form?
Yes. You must report self-employment income whether or not a client sends a 1099. Keep your own records of every payment.
When do I owe self-employment tax?
The IRS says you generally must pay self-employment tax if your net earnings from self-employment are $400 or more. That figure is net profit, after business expenses.
Can I have W-2 and 1099 income in the same year?
Yes, and many people do. You file one return that includes both. Your W-2 withholding counts toward your total tax, which can reduce or cover what you owe on the 1099 income.
Who decides whether I am an employee or a contractor?
It depends on the actual working relationship, such as how much control the business has over how, when and where you work, not just what the contract says. If you think you have been misclassified, the IRS and the Department of Labor both explain how to raise it.