W-2 vs. 1099: Employee or Independent Contractor? What Changes for Your Taxes

Quick answer: if you get a W-2, you’re an employee: your employer withholds income tax, Social Security and Medicare from each paycheck and pays half of the Social Security and Medicare tax. If you get a 1099-NEC, you’re usually an independent contractor: nobody withholds anything, you pay the full 15.3% self-employment tax yourself, and you can deduct your business expenses.

The difference in one table

Who decides if you’re an employee or a contractor?

It isn’t the title on your contract or what you’d prefer. According to the IRS, it depends on how much control the company has over your work. The IRS looks at three groups of facts:

1. Behavioral control: does the company control or have the right to control what you do and how you do it?
2. Financial control: who controls the business side of the job, such as how you’re paid, whether expenses are reimbursed and who provides tools and supplies?
3. Type of relationship: is there a contract or employee-type benefits? Is the work ongoing, and is it a key part of the company’s business?

No single factor decides it. The whole relationship counts. Working remotely doesn’t change this: if the company controls what you do and how, you can still be an employee.

How much more does a 1099 worker pay? An example

Say you earn $40,000 in a year and have no business expenses:

So as a contractor you pay about $2,592 more in Social Security and Medicare on the same $40,000, before any deductions. That’s why a 1099 job should usually pay more than a W-2 job for similar work. Business expenses lower the profit you’re taxed on, which shrinks the difference.

What a 1099 worker should do

• Set money aside from every payment for taxes. Many people keep 25% to 30% in a separate savings account as a rule of thumb.
• Make estimated tax payments if you expect to owe $1,000 or more.
• Track income and expenses every month, even payments without a form.
• File Schedule C and Schedule SE with your Form 1040.

We explain each step, with dates and an example, in taxes on online and freelance income.

Can you have both?

Yes. Many people have a W-2 job and a 1099 side gig. You report both on the same tax return. A useful trick: you can ask your employer to withhold extra tax from your paycheck with a new Form W-4, to cover what you’ll owe on your 1099 income instead of making estimated payments.

What if you think you’re misclassified?

If a company treats you like an employee (sets your schedule, tells you exactly how to work, provides your tools) but pays you on a 1099, you might be misclassified. That means you pay taxes your employer should share, and you may miss out on protections that generally come with being an employee, such as unemployment insurance and workers’ compensation.

Options the IRS offers:

• Form SS-8: either you or the company can ask the IRS to decide your status. It can take at least six months to get an answer.
• Form 8919: if you believe you were misclassified, you can use it to report only the employee’s share of Social Security and Medicare tax on those wages.

Labor rules vary by state, so you can also contact your state’s labor department.

FAQ

Is it better to be W-2 or 1099? It depends. W-2 jobs usually come with withholding, benefits and more protections. 1099 work can offer flexibility and deductions, but you pay more in Social Security and Medicare and handle your own taxes, so compare the total pay.

Do I need permission to work for either? Yes. You generally need legal authorization to work in the U.S. both as an employee and as an independent contractor. An ITIN lets you file taxes, but it doesn’t give you permission to work.

I didn’t get a 1099. Do I still report the income? Yes. All income must be reported, whether or not you receive a form.

When should I get my W-2 or 1099? Employers generally must send W-2 forms by January 31, and most 1099-NEC forms are also due to workers by January 31.

This article is for educational purposes only and is not tax or legal advice. Your situation may be different. Check IRS.gov or ask a tax professional. Read our Disclaimer.