1099 vs W-2 Taxes 2026: What Contractors Really Keep

A $60 Contract Hour Is Not a $60 Wage

The offer sounds better than the job you have: $60 an hour on a 1099 instead of $42 an hour on a W-2. Before signing, three things need pricing in — payroll tax, benefits, and the overtime premium you are giving up.

Self-Employment Tax Is the Big One

An employee pays 7.65% in FICA and the employer pays a matching 7.65%. A contractor pays both halves as self-employment tax: 15.3% on 92.35% of net profit, split into 12.4% Social Security up to the 2026 wage base of $184,500 and 2.9% Medicare with no cap.

Half of the self-employment tax is deductible against income tax, which softens it. It does not eliminate it. On $54,000 of net profit that is roughly $7,600 before a dollar of income tax.

No Overtime Premium

This is the part contractors underestimate. Genuine independent contractors are not covered by the FLSA, so hour 41 pays the same as hour 4. An employee at $42 earns $63 for that hour. Over a busy quarter, the premium an employee collects on 150 overtime hours is real money a contractor never sees.

And No Benefits Budget

Health insurance, paid time off, employer retirement matching, unemployment insurance and workers' compensation are all on you. A common planning approach is to treat 25% to 30% of gross as the tax reserve and another 10% to 20% as the benefits reserve before deciding what the contract actually pays.

Are You Really a Contractor?

Misclassification is widespread. The test is not what the paperwork says, it is who controls the work. If a company sets your hours, supplies your tools, directs your methods, and you have no realistic independent business, you may legally be an employee — owed time and a half for overtime and back wages for what was missed. The Department of Labor's employment relationship guidance is the place to start.

Doing the Comparison Properly

A rough rule: a contract rate needs to be about 25% to 40% above the equivalent employee wage to break even, more if the role involves regular overtime. That range is a starting point, not an answer — run your own figures with the numbers you were actually offered.

Run Your Own Numbers

Use the 1099 tax calculator for self-employment tax and quarterly estimates, the W-2 calculator for the employee side, and the pay comparison calculator to put two offers side by side. For the payroll-tax detail, see the Social Security tax calculator and Medicare tax calculator.