W-2 vs 1099 — Definition and What It Means for Your Income
W-2 employees have taxes withheld by employers; 1099 contractors handle their own taxes and pay higher FICA-equivalent rates.
W-2 refers to traditional employment where employers withhold taxes and pay half of FICA. 1099 refers to independent contractor/freelance work where the worker receives gross pay with no withholding and must pay self-employment tax (15.3%) plus quarterly estimated taxes.
Why it matters
A 1099 contractor earning the same gross amount as a W-2 employee takes home significantly less due to self-employment tax and lack of employer-subsidized benefits.
Example
A worker earning $60,000 gross as a 1099 contractor may take home $40,000-$43,000 after self-employment tax, income tax, and self-funded health insurance — versus $46,000-$49,000 for a W-2 employee at the same gross.
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W-2 vs 1099 — FAQ
Is 1099 income taxed differently than W-2?
Yes. 1099 workers pay the full 15.3% self-employment tax (versus 7.65% FICA for W-2 employees) and must make quarterly estimated tax payments.