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The tax implications of how you get paid — and what to do.
A W-2 employee has an employer who withholds taxes from each paycheck, pays half of FICA taxes on their behalf, and handles most of the tax complexity automatically.
A 1099 contractor is self-employed. No taxes are withheld, they owe the full FICA amount (called self-employment tax), and they are responsible for making quarterly estimated payments to the IRS. The tradeoff: far more deductions, better retirement account limits, and additional tax benefits unavailable to employees.
Common Mistake
As a W-2 employee, you pay 7.65% in FICA taxes and your employer matches it. As a 1099 contractor, you pay both sides — 15.3% total on net self-employment income. On $80,000 of 1099 income, that is $12,240 in SE tax alone, before income tax. This is why a $100,000 1099 offer is not the same as a $100,000 salary — you need to account for the extra 7.65%.
The silver lining: you can deduct half of the SE tax as an above-the-line deduction, which partially offsets the hit.
As a 1099 worker, the IRS expects you to pay taxes as you earn — not just at filing time. Miss the deadlines and you will owe an underpayment penalty even if you pay in full by April.
| Quarter | Income period | Payment due |
|---|---|---|
| Q1 | Jan 1 – Mar 31 | April 15 |
| Q2 | Apr 1 – May 31 | June 16 |
| Q3 | Jun 1 – Aug 31 | September 15 |
| Q4 | Sep 1 – Dec 31 | January 15 (next year) |
* 2025 deadlines — dates shift slightly when they fall on weekends or holidays.
Home office, equipment, software, professional development, health insurance premiums, half of SE tax — all reduce your Schedule C net income before income tax is calculated.
A Solo 401(k) lets you contribute up to $23,500 as the employee plus up to 25% of net earnings as employer — total up to $70,000 in 2025. That is dramatically more tax shelter than a W-2 worker's $23,500 cap.
Self-employed workers can deduct 100% of health, dental, and vision premiums for themselves and their family as an above-the-line deduction — if they are not eligible for employer coverage through a spouse.
Eligible self-employed workers can deduct up to 20% of qualified business income, reducing taxable income significantly. This deduction is not available to W-2 employees.
A common rule of thumb: move 25–30% of every payment you receive into a separate savings account earmarked for taxes. This covers your SE tax (15.3%) plus federal income tax for most income levels, leaving a small cushion for deductions you will claim. Transfer it the same day you deposit — out of sight, out of mind.
The 15.3% tax (12.4% Social Security + 2.9% Medicare) paid by self-employed workers. Equivalent to the combined employer + employee FICA contribution. You can deduct half of it above the line.
The IRS form used by sole proprietors and single-member LLCs to report business income and expenses. Net profit from Schedule C flows into your Form 1040 as ordinary income.
Payments made four times a year (April, June, September, January) by self-employed workers to prepay income and SE taxes. Missing payments can result in underpayment penalties.
A deduction allowing eligible self-employed workers and pass-through business owners to deduct up to 20% of qualified business income. Not available to W-2 employees.
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