US money guide

W-2 vs 1099: what contracting really pays

Updated 3 August 2026 · 6 min read

A $90,000 salary and a $90,000 contract are not the same money. Not close. The headline rate on a contract has to do a lot of work that an employer was quietly doing for you.

The payroll tax difference

As a W-2 employee you pay 7.65% in FICA and your employer pays the other 7.65%. As a 1099 contractor there is no employer, so you pay both halves — 15.3% as self-employment tax. On $90,000 of net earnings that's roughly $6,800 more than an employee would pay.

You do get to deduct half of it from your taxable income, which softens the blow, but the cash still leaves your account.

The benefits nobody prices in

Health insurance — often the biggest single item. An employer plan can be worth $8,000–$20,000+ a year for a family.
Paid time off — as a contractor, a two-week holiday is two weeks unpaid. Three weeks off plus holidays is roughly 8% of your year.
401(k) match — gone, though you can open a Solo 401(k) or SEP IRA with high limits.
Unemployment insurance and workers' comp — generally not available to you.
Unpaid gaps between contracts — the risk transfers to you.

The rule of thumb: to match a W-2 salary, a contract rate usually needs to be 25–50% higher. Below that, you're taking on more risk for less money — which is a decision you should make deliberately, not by accident.

Compare the actual take-home →Model both and see the difference in your pocket, by state.

Quarterly taxes — the part that catches people

Nobody withholds tax for you. The IRS expects estimated payments four times a year (roughly April, June, September and January), and underpaying brings penalties. The practical answer is boring and effective: move 25–35% of every payment into a separate account the day it arrives, and never treat it as yours.

What's genuinely better about 1099

Real deductible expenses — equipment, software, a home office, business travel, professional insurance. The Qualified Business Income deduction can shelter up to 20% of qualified income for many contractors. Retirement limits are far higher than a standard 401(k). And you can work for several clients at once.

One thing worth checking

Being called a contractor doesn't make you one. If a company controls your hours, supplies your equipment and directs how you work, you may legally be an employee who's been misclassified — which affects your tax, your benefits and your rights. The IRS and many states take this seriously, and you can ask for a determination.

Quick answers

How much more should a 1099 contractor charge than a W-2 employee?

A common rule of thumb is 25–50% more, to cover self-employment tax, health insurance, unpaid time off and the lack of employer benefits.

What is self-employment tax?

As a 1099 contractor you pay both halves of Social Security and Medicare — 15.3% on net self-employment earnings, versus 7.65% as an employee. You can deduct half of it.

Do 1099 contractors pay more tax?

On payroll taxes, yes — you cover the employer half too. But you can deduct genuine business expenses and may qualify for the qualified business income deduction, which offsets some of it.

Written in plain English by mytakehome.money. General information, not financial advice — check anything important at gov.uk or with a qualified adviser.