W-2 and 1099 Income
Compare how employees and contractors are taxed, from withholding to self-employment tax and quarterly payments.
TL;DR
- Get taxes withheld for you on a
W-2; handle them yourself on a1099. - Pay both halves of Social Security and Medicare as
selfEmploymentTax. - Send
quarterlyEstimatesonce you expect to owe $1,000 or more.
W-2 vs 1099 at a Glance
W-2 EmployeeYour employer withholds tax and pays half your payroll tax.
Withholding + benefits done for you1099 ContractorYou run the tax side yourself, from payments to deductions.
No withholding, no benefitsWho DecidesThe IRS looks at who controls how and when you work.
They control it? EmployeeWhich 1099Clients use one form; payment apps and marketplaces use another.
NEC: $2,000+ / K: $20,000 + 200 salesPayroll Taxes
Employee ShareW-2 workers pay half; the employer pays the other half.
6.2% SS + 1.45% Medicare = 7.65%Self-Employment TaxContractors pay both halves on their net profit.
12.4% + 2.9% = 15.3%The 92.35% RuleSE tax applies to 92.35% of profit, mirroring the employer's deduction.
Profit x 92.35% x 15.3%Deduct HalfHalf of your SE tax comes off your income for income tax.
$8,000 SE tax = $4,000 deductionQuarterly Estimated Payments
Who PaysAnyone who expects to owe $1,000 or more at filing.
Expect to owe $1,000+? Pay quarterly2026 Due DatesFour payments that do not fall exactly every three months.
Apr 15, Jun 15, Sep 15, Jan 15Safe HarborPaying last year's tax in four parts avoids any penalty.
100% of last year (110% if $150k+)Set It AsideSave a fixed share of every payment for taxes.
Save 25%-30% of each 1099 paymentContractor Deductions
Schedule CBusiness costs come off your income before any tax is figured.
Revenue - expenses = net profitHome OfficeA space used only for work can earn a simple deduction.
$5/sq ft, up to 300 sq ft = $1,500Business MileageLog each business drive to deduct a standard rate per mile.
76 cents/mile (72.5 before July 2026)Retirement PlansA SEP-IRA or solo 401(k) shelters large amounts of profit.
Up to $72,000 in 2026Tips
- Move 25% to 30% of every
1099payment into a separate savings account the day it lands, so tax money is never spent. - Deduct real business costs on
Schedule C; each dollar lowers both your income tax and your self-employment tax.
Warnings
- Paying your full tax in April does not undo an
underpaymentpenalty for skipped quarterly payments during the year. - Comparing a
1099rate with a W-2 salary dollar for dollar ignores the extra 7.65% payroll tax and the benefits you now fund yourself.
In Practice
Compare the Social Security and Medicare bill on the same pay as an employee and as a contractor.
You earn $60,000 in 2026, either as a W-2 salary or as $60,000 of 1099 net profit.
- As an employee: $60,000 x 7.65% = $4,590 payroll tax.
- As a contractor: $60,000 x 92.35% = $55,410 subject to SE tax.
- SE tax: $55,410 x 15.3% = $8,478.
- The gap: $8,478 - $4,590 = $3,888 more as a contractor, before the half-SE-tax deduction.
As a contractor you pay about $3,888 more in payroll tax.
A 1099 rate needs to beat a W-2 salary to come out even.
FAQ
An employee works under the company's direction and gets a W-2 with taxes already withheld. A contractor controls how the work gets done, gets a 1099-NEC or 1099-K, and pays their own taxes. The label depends on the real working relationship, not just what the contract says.
Employees pay 7.65% for Social Security and Medicare, and their employer quietly pays another 7.65%. Contractors are both worker and employer, so they pay the full 15.3% self-employment tax. Half of it is deductible, which softens the hit a little.
Yes, if you expect to owe $1,000 or more for the year after withholding and credits. Payments for 2026 are due April 15, June 15, and September 15, 2026, and January 15, 2027. Paying at least 100% of last year's tax, or 110% if your AGI was over $150,000, keeps you penalty-free.
For 2026 work, a client generally sends a 1099-NEC if they paid you $2,000 or more, up from $600. Payment apps and marketplaces send a 1099-K once you pass $20,000 and 200 transactions. You owe tax on all of your income either way, form or no form.