1099 vs W-2: what changes for your taxes

Taking a contract instead of a job, or being offered either, raises the same question: what changes for tax? Quite a lot, mostly in who pays what and when. This guide compares the two side by side and shows what a contract rate needs to cover to match a salary.

By Awais Jameel, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. Checked against official sources on . 2 minute read.

Short answer

1099 vs W-2 comes down to who handles the tax. A W-2 employee has income tax withheld and pays 7.65% for Social Security and Medicare while the employer pays the rest. A 1099 contractor has nothing withheld, pays the full 15.3% self-employment tax, makes quarterly payments, and can deduct business expenses.

At a glance

W-2 withholding
Income tax and FICA withheld from each paycheck
1099 withholding
None. You pay through quarterly estimates
Social Security and Medicare, W-2
7.65% paid by you, 7.65% by the employer
Self-employment tax, 1099
15.3% of 92.35% of profit, half deductible
Business expenses
Deductible on Schedule C for 1099 workers
Benefits
Usually provided to employees, not contractors
1099 vs W-2: what changes for your taxesW-2 withholding: Income tax and FICA withheld from each paycheck; 1099 withholding: None. You pay through quarterly estimates; Social Security and Medicare, W-2: 7.65% paid by you, 7.65% by the employer; Self-employment tax, 1099: 15.3% of 92.35% of profit, half deductible; Business expenses: Deductible on Schedule C for 1099 workers; Benefits: Usually provided to employees, not contractors.KEY FACTS AT A GLANCE1099 vs W-2: what changes for your taxesW-2 withholdingIncome tax and FICAwithheld from eachpaycheck1099 withholdingNone. You pay throughquarterly estimatesSocial Security and Medicare, W-27.65% paid by you, 7.65%by the employerSelf-employment tax, 109915.3% of 92.35% ofprofit, half deductibleBusiness expensesDeductible on Schedule Cfor 1099 workersBenefitsUsually provided toemployees, notcontractorsChecked against official sourcesTax Bakers1099 vs W-2: what changes for your taxesW-2 withholding: Income tax and FICA withheld from each paycheck; 1099 withholding: None. You pay through quarterly estimates; Social Security and Medicare, W-2: 7.65% paid by you, 7.65% by the employer; Self-employment tax, 1099: 15.3% of 92.35% of profit, half deductible; Business expenses: Deductible on Schedule C for 1099 workers; Benefits: Usually provided to employees, not contractors.KEY FACTS AT A GLANCE1099 vs W-2: what changes for yourtaxesW-2 withholdingIncome tax and FICA withheld from eachpaycheck1099 withholdingNone. You pay through quarterly estimatesSocial Security and Medicare, W-27.65% paid by you, 7.65% by the employerSelf-employment tax, 109915.3% of 92.35% of profit, half deductibleBusiness expensesDeductible on Schedule C for 1099 workersBenefitsUsually provided to employees, notcontractorsChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

How do 1099 and W-2 income compare?

W-2 employee1099 contractor
Tax withheldIncome tax and FICA from each paycheckNone
Social Security and Medicare7.65% of wages, matched by the employer15.3% self-employment tax on 92.35% of profit, half deductible
Paying tax during the yearAutomatic through withholdingQuarterly estimated payments
Work expensesGenerally not deductibleDeductible on Schedule C
Retirement plansEmployer plan, if offeredSEP IRA or Solo 401(k) you set up
Health insuranceOften subsidized by the employerBought yourself, with a deduction in many cases
Unemployment and workers' compensationCoveredNot covered
Year-end formForm W-2Form 1099-NEC or 1099-K, or none

What does a contract rate need to cover?

Compare a $100,000 salary with $100,000 of contract income and no business expenses, looking only at Social Security and Medicare for 2026:

  • As an employee, you pay 7.65%, or $7,650. Your employer pays another $7,650 on top.
  • As a contractor, self-employment tax is 15.3% of $92,350, or about $14,130, and half of it, about $7,065, is deducted for income tax.

So the contractor pays about $6,480 more in these taxes alone, before counting the employer's health insurance, retirement match, paid leave and equipment the employee would have had. That is why contract rates usually need to be well above the equivalent salary. See self-employment tax explained.

Where does the contractor come out ahead?

  • Business expenses such as equipment, software, a home office and business travel reduce taxable profit. See deductible business expenses.
  • The qualified business income deduction can reduce taxable income by up to 20% of qualified business profit, subject to limits.
  • Retirement contributions can be much larger through a Solo 401(k), up to $72,000 in total for 2026.

How does cash flow differ?

An employee's tax is taken before they are paid. A contractor receives the full amount and must set aside tax, then pay it quarterly. The most common first-year problem for new contractors is spending money that was owed to the IRS. See estimated quarterly taxes.

What if you have both?

Many people have a W-2 job and 1099 side income. Wages count first towards the Social Security wage base, $184,500 for 2026, so high earners may pay less self-employment tax on side income. You can also increase withholding at your job to cover the tax on side income instead of making quarterly payments. See side hustle taxes. See how to file taxes as a freelancer.

Can the employer choose?

Not freely. Whether someone is an employee or a contractor depends on how the work is controlled, not on which form the business prefers. See independent contractor or employee.

Weighing a contract against a salary?

Send us both offers. We compare the take-home pay after tax, benefits and costs, so you can decide on real numbers.

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Questions people ask

Do you pay more tax on 1099 income than W-2 income?

Usually more Social Security and Medicare tax, because a contractor pays both halves. Deductible business expenses can offset part of that.

Is tax withheld from 1099 income?

No, unless backup withholding applies. Contractors pay through quarterly estimated tax payments.

How much more should a contract rate be than a salary?

Enough to cover the employer's half of Social Security and Medicare, benefits you would otherwise receive, and your business costs. That often means well above the equivalent salary.

Can I have both W-2 and 1099 income?

Yes. Report both on your return. Wages count first towards the Social Security wage base.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS: Self-employment tax (Social Security and Medicare taxes)
  2. Social Security Administration: Contribution and benefit base, 2026
  3. IRS: Independent contractor (self-employed) or employee?

Rules and fees change. If you are reading this long after September 30, 2026, confirm the figures with the source before you rely on them.

Freelancers and self-employedSelf-employment tax explainedPayroll and contractorsIndependent contractor or employee: how the IRS tells them apartFreelancers and self-employedHow to file taxes as a freelancer: a first-year guide

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This guide is general information. It is not tax or legal advice for your situation.