1099 vs W-2: What's the Difference?

The difference between 1099 contractor status and W-2 employee status is huge when it comes to taxes. Here's what you need to know.

The Tax Difference

As a W-2 employee, your employer withholds income tax and pays half of your Social Security and Medicare taxes (7.65%). You pay the other half (7.65%).

As a 1099 contractor, you pay the full 15.3% yourself. This is called self-employment tax. On top of that, you're responsible for making quarterly estimated tax payments, there's no withholding.

The Math

Let's say you earn $60,000. Here's how the taxes compare:

As a W-2 employee:

• Social Security and Medicare tax: $4,590 (7.65% of $60,000)
• Employer pays: $4,590 (you never see this)
• Total FICA tax: $9,180

As a 1099 contractor:

• Self-employment tax: $8,478 (15.3% on 92.35% of $60,000)
• You pay all of it

Notice that as a contractor, you actually pay slightly less total tax ($8,478 vs $9,180). But you're paying all of it yourself instead of splitting it with an employer.

The Hidden Costs of Being a Contractor

Beyond self-employment tax, contractors don't get:

• Employer-sponsored health insurance
• 401(k) matching
• Paid time off
• Unemployment insurance
• Workers' compensation coverage

Rule of thumb: if you're comparing a W-2 job at $60,000 to a 1099 contract at $60,000, the 1099 contract needs to be at least $75,000 to equal the W-2 job when you account for benefits and taxes.

The Upside of Being a Contractor

You can deduct business expenses. As a W-2 employee, you can't deduct your commute, your laptop, your home office, or your professional development courses (those deductions were eliminated in 2018).

As a 1099 contractor, you can deduct all legitimate business expenses. This often brings your actual taxable income down significantly.

From Our Practice

We see a lot of people in Northern Virginia who get misclassified as contractors when they should be employees. The IRS has strict rules about who qualifies as a contractor. If your "client" sets your hours, tells you how to do the work, and provides all the tools, you're probably an employee being misclassified to save the company money.

If you think you've been misclassified, file Form SS-8 with the IRS. They'll investigate and determine your correct status.

Calculate Your 1099 Taxes

Use our 1099 Tax Calculator to estimate your tax liability on contractor income.