A W-2 means you're an employee: your employer withholds income tax and Social Security and Medicare, and pays its own matching share. A 1099 means you're treated as an independent contractor: nothing's withheld, and you pay self-employment tax of 15.3% yourself, though you can deduct business expenses and the employer-equivalent part of that tax.
The same hourly rate can mean very different take-home pay depending on whether it comes with a W-2 or a 1099. And the label on your contract doesn't decide which one applies: the IRS looks at how the work is controlled. Here's the difference in plain terms, and how to compare the two.
W-2 vs 1099 side by side
| W-2 employee | 1099 contractor | |
|---|---|---|
| Income tax withheld | Yes, by the employer | No, you pay estimated tax |
| Social Security and Medicare | Split with the employer | You pay the full 15.3% as self-employment tax |
| Employer pays unemployment tax | Yes | No |
| Business expenses | Generally not deductible | Claimed on Schedule C |
| Tax form you get | Form W-2 | Form 1099-NEC if paid at least 2,000 dollars by one payer for 2026 |
| Who controls how the work is done | The employer | You |
How the IRS decides your status
This is the part that matters if your status feels wrong. The IRS doesn't care what your contract calls you. It looks at evidence of control and independence in three categories:
- Behavioural. Does the company control, or have the right to control, what you do and how you do it?
- Financial. Who controls the business side: how you're paid, whether expenses are reimbursed, who provides tools and supplies?
- Type of relationship. Is there a written contract, employee-type benefits like a pension or paid leave, an ongoing relationship, and is your work a key part of the business?
There's no magic number of factors. The key, the IRS says, is the right to direct and control the details of the work. It even gives the remote-work example: a remote worker is still an employee if the company can control what's done and how, even if they choose where to work.
The tax difference, worked through
On a W-2, Social Security and Medicare are split between you and your employer. On a 1099, you pay both halves as self-employment tax: 12.4% for Social Security plus 2.9% for Medicare, 15.3% in total. You can deduct the employer-equivalent portion when working out your adjusted gross income, and you can deduct business expenses, which W-2 workers generally can't.
Rough rule for comparing offers: a 1099 rate needs to be noticeably higher than a W-2 rate to come out level, because you're also covering the employer's share of payroll tax and usually your own benefits, holidays and equipment. That's a comparison I'd make before saying yes to any contractor role.
Worked comparison: the same pay on a W-2 and a 1099
Say you're offered 60,000 dollars as an employee or 60,000 dollars as a contractor. On the W-2, your Social Security and Medicare are 7.65% of pay and your employer covers the other 7.65%. On the 1099, you pay the full 15.3% yourself, before the deduction for the employer-equivalent half and before your business expenses. The difference in payroll tax alone on 60,000 dollars is roughly 4,590 dollars. These sums are mine, worked from the IRS rates, to show why the headline numbers aren't equal.
Signs you might be misclassified
- You're told exactly how, when and where to do the work.
- The company provides your tools and reimburses expenses like an employer.
- You work only for them, ongoing, doing a core part of their business.
- You were moved from W-2 to 1099 without any change in how you work.
If that sounds familiar, the IRS publishes guidance on worker classification. It's worth raising, because an employer-employee relationship generally means your earnings aren't subject to self-employment tax at all.
Can you be both?
Yes, and lots of people are. You might have a W-2 day job and freelance on the side. Your employer withholds tax on the salary as normal, while the side income goes on Schedule C and may owe self-employment tax. The two don't cancel out, so plan for the tax on the side income separately, either through estimated payments or by asking your employer to withhold a little more from your salary.
Want AI doing the heavy lifting in your marketing?
I build the systems that handle the boring 80 percent, so you get your week back. Done properly, with the human kept in.
When a 1099 is the better deal
Contracting isn't worse by default. You can deduct real business costs, work for several clients, set your own hours and charge more. If you run it as a business, with separate records and money set aside for tax, a 1099 can work out well.
What to do if you're switching to 1099
- Set aside money for tax from every payment, since nothing is withheld.
- Plan for quarterly estimated tax payments.
- Track business expenses from day one.
- Expect a 1099-NEC from each client who paid you at least 2,000 dollars, but report all your income either way.
My verdict
Don't compare a 1099 and a W-2 offer on the hourly rate alone. Add up the taxes and benefits each side covers, then decide. If you're going independent, my honest freelancing tips and LLC vs sole proprietorship are good next reads.
Frequently asked questions
What's the difference between a 1099 and a W-2?
A W-2 employee has taxes withheld and the employer pays its share of payroll tax. A 1099 contractor has nothing withheld and pays 15.3% self-employment tax.
Who decides if I'm a contractor or an employee?
The facts do, not the contract. The IRS looks at behavioural control, financial control and the type of relationship.
Can a remote worker be a W-2 employee?
Yes. The IRS says a remote worker is an employee if the company can control what's done and how.
Can 1099 workers deduct expenses?
Yes. Contractors report business income and expenses on Schedule C and can deduct the employer-equivalent part of self-employment tax.
When do I get a 1099-NEC?
A business files one for each non-employee it paid at least 2,000 dollars for services, under the 2026 instructions, by January 31.
