W-2 vs 1099: what one worker costs each way

For an employee, the business pays the wage plus its own share of payroll taxes: Social Security at 6.2% up to the wage base, Medicare at 1.45%, federal unemployment tax (FUTA) on the first $7,000 of wages, and state unemployment tax. Some states add programs of their own. For a contractor, the business generally withholds and pays none of these. It reports what it paid on Form 1099-NEC once the year’s payments reach $2,000.

An employee has 6.2% Social Security and 1.45% Medicare withheld from each paycheck, the same as the business pays. A contractor pays both halves as self-employment tax: 15.3% (12.4% Social Security and 2.9% Medicare) on 92.35% of net earnings, and deducts half of it on the income tax return. That is why contractors often charge more than the same job pays on a W-2.

The IRS looks at the whole working relationship in three groups: behavioral control, financial control and the type of relationship. No single factor decides it. Treating an employee as a contractor without a reasonable basis can make the business liable for the employment taxes. If it is unclear, you can file Form SS-8 and the IRS will decide, which can take at least six months.

How to hire your first employee

• Income tax. It depends on the worker’s whole return, so neither side includes it.
• Workers’ comp and benefits, unless you enter them as other costs. Workers’ comp rates depend on the job.
• City and local taxes, and the Additional Medicare Tax on high wages.
• A contractor’s business expenses, which come out of the 1099 pay.

Workers’ comp rules by state

IRS Publication 15 (2026), Employer’s Tax Guide; IRS, Independent contractor (self-employed) or employee?; Instructions for Forms 1099-MISC and 1099-NEC; each state’s labor and revenue agency pages for unemployment tax and payroll programs.

Rates checked October 24, 2026. How we check facts.