Getting Paid as a 1099 Contractor vs. W-2 Employee

The number of independent contractors in the US has grown steadily over the past ten years, reaching 51 million in 2023. If, like many others, you’re considering the option of converting from a W-2 employee to a 1099 contractor (or the other way around), you want to factor in how, when, and what you’ll be paid.

Getting paid as an independent contractor is quite different from getting paid as an employee. You have more control over your fees and processes, but you also have more responsibilities and tax obligations. 

In this article, you’ll learn the differences between being a 1099 contractor and a W-2 employee, how it impacts your pay experience, and what to expect come tax season.

1099 contractor vs. W-2 employee: What’s the difference?

A 1099 contractor is a self-employed worker hired on a contract basis for specific projects. They are independent, set their own hours, use their own equipment, and do not receive employee benefits such as health insurance or paid time off. Clients issue a 1099-MISC form to report payments made to these contractors for tax purposes.

A W-2 employee is a payroll worker with set wages, hours, and benefits. Employers have more control over their work process and deduct taxes like income tax, Social Security, and Medicare from their pay. Employees receive a W-2 form annually to report income and taxes withheld for filing their tax returns.

Read our article on the differences between Form W-2 and Form 1099 to learn more.

How a 1099 contractor gets paid

Contractors are actually considered business owners—you’re your own boss. So getting paid as an independent contractor will be very similar to how businesses pay each other—using invoices.

Getting paid as an independent contractor typically involves requesting payment via invoices and receiving payment within a defined payment period. Here’s a closer look at the step-by-step process.

1. Creating an invoice

First, the contractor creates a digital or paper invoice that includes:

• Business information (business ID, address, etc.)
• Contractor contact information
• Client contact information
• Services completed
• Amount due
• Payment terms
• Preferred payment methods

Read our guide on how to invoice a client as an independent contractor to learn more and access a free invoice template.

2. Sending your invoice

The contractor then sends the invoice to the client via email or through a digital platform. The contractor should receive payment within the amount of time outlined in their invoice or contract. If you don’t receive payment from your client within your defined window, here’s how to professionally ask for payment.

Some companies use automated services to pay their contractors, which works well for contractors that get paid the same amount on a regular basis. Companies using Deel can hire, pay, and manage contractors all on one platform.

3. Payment methods

As an independent contractor, you set the terms of how you’re paid. Payment methods can range from cash and cheque to direct deposit or bank transfers. Read our guide on payment methods for independent contractors for more information.

4. How much does a 1099 contractor get paid?

As a 1099 contractor, your income will depend on how much work you do, what you charge, and how you bill. For example, you may bill per project and receive one large lump-sum payment. If you charge by the hour and bill weekly, you may receive several smaller-sum payments.

Importantly, the payments you receive won’t have taxes deducted from them—this affects your taxes at the end of the year. You may also collect sales tax depending on your business and your location.

5. Payment schedules

Your payment schedule will depend on the terms of the contract agreement. For example, if you’re hired for a short-term project, you might make payment due upon completion.

Some contractors require deposits throughout the project life cycle. A typical deposit schedule is 50% upon contract signing and 50% upon project completion. If a contractor provides ongoing services, such as bookkeeping, they might invoice their client weekly, bi-weekly, or monthly.

Learn more about the payment process by reading our guide on getting paid as an independent contractor.

What taxes do 1099 contractors pay?

Tax compliance tends to be more challenging for 1099 contractors than W-2 employees.

As business owners, 1099 contractors must pay income tax (based on their income level) and self-employment tax. Self-employment tax comprises Social Security and Medicare taxes, similar to the FICA tax withheld from a W-2 employee’s pay. You can determine your self-employment taxes using ​​Schedule SE (Form 1040) from the IRS.

Additional state or municipal taxes may apply depending on which state you live in. Some states—such as Washington and Texas—don’t charge personal income tax.

Read our overview of paying taxes as an independent contractor to learn more.

1099 tax rate

The self-employment tax rate is divided into two parts: Social Security tax (old-age, survivors, and disability insurance) is 12.4%, and Medicare tax (hospital insurance) is 2.9%. In total, self-employment tax is 15.3% of your income.

Tax deductions

Unlike employees, eligible 1099 contractors may claim the following expenses as tax deductions:

• Home expenses: Rent, phone, internet, mortgage interest, real estate or property taxes, home security, and more
• Office and business expenses: Stationery supplies, equipment, office repairs and maintenance, and utilities
• Travel and car expenses: Rideshares to meetings, client meals, airfare, and parking
• Business development: Advertising, licenses, insurance, and other business investments

Learn more about the tax deductions independent contractors can claim.

Do you meet the criteria of a 1099 contractor?

To determine if you're a 1099 contractor, consider these criteria:

1. Behavioral Control: If you control when, where, and how you work without needing employer approval, you're likely a contractor. If your employer dictates your hours and process, you're likely an employee.
2. Financial Control: Contractors provide their own equipment and are paid per project, while employees receive equipment and reimbursement from their employer.
3. Type of Relationship: If your work is permanent, includes benefits like health insurance or paid time off, and you have an exclusivity clause, you are likely an employee.

If your role meets employee criteria but you're classified as a contractor, this could be a case of misclassification.

Note: Misclassified workers can result in non-compliance with local labor laws. Learn more about the Employee Misclassification, and avoid the hefty fines and penalties.

How a W-2 employee gets paid

As a W-2 employee, getting paid is a straightforward process that tends to require much less work than getting paid as an independent contractor.

1. Payment setup

During a typical employee onboarding process, employers will request banking information from their new hires so they can transfer their weekly or monthly pay to them with ease.

Your employer may request a void check, which includes all the necessary banking information but can’t be cashed. Or, they may request direct deposit information such as your bank account number, routing number, type of account (checking or savings), bank name and address, and names of the account holders.

2. Payment method

Your payment method will depend on the agreement you have with your employer. You may receive a physical paycheck, a bank transfer, or a direct deposit.

3. How much does a W-2 employee get paid?

Your hourly wage or salary should be stated in your employment contract. Your employer will deduct taxes from your paychecks in accordance with your state’s tax laws.

Salaried employees will receive the same amount of pay in each paycheck unless they receive additional monetary compensation such as a bonus, commission, or overtime pay. If you’re paid by the hour, your paycheck will vary depending on the hours you worked during your pay period. 

4. Payment schedule

W-2 employees are paid on a consistent schedule that’s determined by their employer. Payroll is typically completed on a bi-weekly basis, but weekly or monthly payments are also common in some countries. W-2 employees will receive a pay stub on payday that states their income earned during the pay period and the amount of taxes withheld.

What taxes do W-2 employees pay?

Employers are responsible for withholding income tax and payroll tax from their employees’ paychecks. Payroll taxes vary depending on the state and can include:

• Federal Income Withholding Tax
• Federal Insurance Contribution Act (FICA)
• State Income Tax Withholding/Employee’s Contributions for SSI
• State Unemployment Tax (SUTA)
• Federal Unemployment Insurance Taxes/Employer’s Contributions for FUTA

W-2 employee tax rate

In the US, employers and employees pay four federal payroll taxes at the following rates:

• Social Security Tax: 12.4% total (half paid by the employee, half paid by the employer)
• Medicare Tax: 2.9% of employee earnings (half paid by the employee, half paid by the employer)
• Unemployment Tax: 6% on the employee’s first $7,000 earned, paid by the employer
• Income Tax: Varies depending on employee’s wages

Learn more about W-2 forms and tax deductions.

Tax deductions

Although W-2 employees can’t write off as many expenses as an independent contractor, they can still claim some deductions:

• Standard deduction: For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly, an increase from 2023 ​(IRS)​
• Itemized deductions: You can still itemize deductions for medical and dental expenses, state and local taxes, and charitable donations. These categories remain unchanged.
• 401(k) contributions: The limit has increased to $23,000 in 2024, with a catch-up contribution of $7,500 for those aged 50 and older ​(IRS)​
• IRA contributions: The limit for traditional and Roth IRAs has risen to $7,000, or $8,000 for individuals aged 50 and older
• Child tax credit: For 2024, the credit remains up to $2,000 per qualifying child under 17, with $1,700 of it refundable​

Estimate your take-home pay with a calculator

If you’re considering a new role as a W-2 employee, you’ll want to know what your take-home pay will be. Take-home pay is the income you receive after taxes are deducted from your pay. Luckily, you don’t have to do the math yourself.

Using Deel’s Take Home Pay Calculator, select your country, payment period (annually or monthly), and salary to see your take-home pay. You’ll get a breakdown of the estimated taxes deducted from your pay and can refine your results to see your net annual, monthly, or semi-monthly income.

What’s best for you? It’s a personal decision

Understanding how you get paid as a contractor or an employee is one part of your decision. Your personal values, like your career goals or work-life balance, will also play a role. No matter which path you take, consider Deel as your payment resource. 

Compared to competitors, Deel offers more funding options for companies, more withdrawal methods for contractors, and automations for invoicing and payroll, providing seamless experiences for contractors, EOR employees, and direct employees.

Businesses using Deel can hire, manage, and pay contractors and employees easily and compliantly. With our global payment solution, you can pay your entire team in just one click, automate payslips, and take tasks like tax calculation and legal compliance off your plate. Explore our global payroll solution or schedule a 30-minute product demo with an expert.

Disclaimer: This article is informational and so should not be considered tax advice. Consult with a tax advisor or ask an accountant or CPA for help.‍