The single biggest tax difference between a 1099 contractor and a W2 employee comes down to one number: 15.3%. That is the self-employment tax — the contractor's share of Social Security and Medicare — and it is paid entirely by the contractor on their net business income.
Withholding vs. self-payment
W2 employees see federal income tax, Social Security, and Medicare withheld from every paycheck. The employer pays half of FICA (7.65%) on their behalf. 1099 contractors receive their income gross. They are responsible for quarterly estimated tax payments and the full 15.3% SE tax on the first $184,500 of net earnings (2026 Social Security wage base), with the 2.9% Medicare portion continuing above that threshold.
Business deductions change the math
A W2 employee generally cannot deduct unreimbursed work expenses. A 1099 contractor reports business expenses on Schedule C, directly reducing the income that gets taxed. Common deductions include home office, mileage, equipment, software, insurance, and the deductible half of SE tax. A contractor with $100,000 of gross revenue and $20,000 of legitimate expenses is taxed on $80,000 — a meaningful difference.
Retirement contributions favor the contractor
1099 contractors have access to a Solo 401(k) ($23,500 employee deferral for 2026 plus up to 25% employer profit-sharing) or a SEP IRA (up to 25% of net adjusted earnings, capped at $70,000). These limits dwarf the contribution caps available to most W2 employees, which is one of the most underused tax-planning tools for self-employed individuals.
The bottom line
Per dollar of gross income, a W2 is simpler. Per dollar of net tax paid on the same revenue, a thoughtfully structured 1099 contractor — especially one who later elects S-Corp status — frequently comes out ahead. The right answer depends on income level, expenses, benefits, and how much complexity you are willing to manage.