Is it better to be a 1099 contractor or a W-2 employee?
It depends. Employees have taxes withheld and often get benefits, while contractors have more flexibility and can deduct expenses but handle their own taxes.
Tax guide
1099 vs W-2
A W-2 means you are treated as an employee with taxes withheld from your paychecks, while a 1099 means you are an independent contractor responsible for paying your own taxes.
When you are a W-2 employee, your employer withholds income tax from each paycheck and pays half of your Social Security and Medicare taxes for you. You generally get less control over how the work is done, but you also carry less of the tax burden directly.
When you receive a 1099, you are running your own small business in the eyes of the IRS. No taxes are withheld, you can usually deduct business expenses, and you pay self-employment tax of 15.3 percent to cover both halves of Social Security and Medicare. You may also need to make quarterly estimated tax payments since no one is withholding for you.
Worker classification is based on the actual working relationship, not just which form is used. Misclassifying an employee as a contractor can cause tax problems, so it helps to understand which category fits your situation.
In short
Key points
- W-2 means employee status with taxes withheld from pay
- 1099 means independent contractor status with no withholding
- Employers pay half of an employee's Social Security and Medicare taxes
- Contractors pay full self-employment tax of 15.3 percent
- Contractors can usually deduct business expenses and may owe quarterly taxes
- Classification depends on the real working relationship, not just the form
FAQ
Frequently asked questions
Why do contractors owe more tax per dollar?
Contractors pay the full 15.3 percent self-employment tax, while employers cover half of that for W-2 employees.
Can the same job be either one?
Classification depends on the working relationship and control over the work, not preference. The facts of the arrangement determine the correct status.
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