1099 vs W-2: what changes when nobody withholds

The first year someone goes from a W-2 job to contract work is almost always the year they get a spring surprise. The work feels the same. The money looks better. Then April arrives and there's a number at the bottom of the return that nobody warned them about.

Here's what actually changed.

Nobody is withholding anything

On a W-2, your employer takes federal tax, state tax, Social Security and Medicare out of every cheque before you see it. By April you have usually overpaid slightly, which is why a refund feels normal.

On a 1099, none of that happens. The full amount lands in your account and every one of those obligations still exists. The money in your account was never entirely yours.

You now pay both halves of one tax

This is the part that stings. Social Security and Medicare are 15.3% of earnings. As an employee you pay 7.65% and your employer quietly pays the other 7.65%. As a contractor you are both, so you pay the whole 15.3% — on top of regular income tax.

That is self-employment tax, and on $60,000 of net profit it is roughly $8,500 before a dollar of income tax is calculated. You do get to deduct half of it, which softens the blow, but it does not remove it.

What you get in exchange

Real deductions, ones an employee cannot take at all:

• Mileage driven for work, at the standard rate
• A home office, if a space is used regularly and exclusively for the business
• Equipment, software, phone and internet in proportion to business use
• Professional services, supplies, and business insurance
• Retirement contributions through a SEP-IRA or solo 401(k), which are far larger than an IRA allows

Deductions reduce your net profit, and net profit is what both income tax and self-employment tax are calculated on. Every legitimate expense you fail to record is taxed twice over.

The fix is quarterly, not annual

The tax system expects to be paid through the year. If you're going to owe meaningfully, you make four estimated payments — and skipping them creates an underpayment penalty even if you pay in full in April.

A workable rule for a first year: set aside 25–30% of every payment you receive in a separate account and don't touch it. Refine that number once you have a return to project from. Getting the habit right in year one matters more than getting the percentage perfect.