Life changes
From W-2 Employee to 1099 Contractor: What Changes
Same work, different paperwork. As a contractor, nobody withholds tax for you, you pay both halves of Social Security and Medicare, and your business costs become deductions.
Reviewed by LaToya Clark-Thompson, FounderLast updated
What changes on your return
As an employee, your employer withheld income tax and paid half of your Social Security and Medicare tax. As a contractor, clients pay you the full amount, and the return picks up three new pieces: Schedule C for income and expenses, Schedule SE for self-employment tax (both halves of Social Security and Medicare), and the deduction for half of that self-employment tax.
You may also qualify for the qualified business income deduction, which can reduce income tax on business profit, and for deductions an employee does not get, such as self-employed health insurance and retirement plans like a SEP IRA or solo 401(k). Our 1099 vs W-2 comparison lays out the differences side by side.
Set these up before the first invoice
- Open a separate bank account for business income and expenses
- Decide how you will track income, expenses and mileage, even if it is a simple spreadsheet
- Estimate your yearly profit and set aside a share of every payment for taxes
- Schedule quarterly estimated payments with Form 1040-ES (federal) and the SC estimated payment voucher, or pay online
- Look at health insurance and retirement options, since your employer no longer provides them
Our quarterly tax calculator and self-employment tax calculator give a starting point for the set-aside.
Are you really a contractor?
Some workers are labeled contractors when the relationship looks like employment: the company sets your hours, provides the tools, trains you and controls how the work is done. Being misclassified means paying self-employment tax that an employer should have shared. If your new arrangement looks exactly like your old job without the W-2, read our employee vs contractor guide. The IRS has a process, using Form SS-8, for asking it to decide.
Forms, records and common mistakes
- Form W-2 from your old employer for the part of the year you were an employee
- Form 1099-NEC from clients who paid you above the reporting threshold, which is higher than it used to be
- Form 1099-K if clients paid through a card processor or payment app
- Your own income records, which matter more than the 1099s
- Estimated payment confirmations, federal and state
The classic first-year mistake is spending the full payment and facing the whole tax bill at filing time, with an underpayment penalty on top. Others: missing deductible costs because receipts were not kept, forgetting that self-employment tax applies even when income tax is low, and not counting income from a client who did not send a 1099.
When to bring in a preparer
The first year as a contractor is when getting help pays off most, because the setup decisions repeat every year after. We prepare the return, set your estimated payments, and tell you honestly when an LLC or S corporation election would or would not make sense. Start with our self-employed tax services or tax planning; the self-employment tax guide is good background before your first appointment.
Frequently asked questions
Do I pay more tax as a 1099 contractor than as a W-2 employee?
Often you pay more in Social Security and Medicare, because you cover both halves through self-employment tax. Against that, you can deduct business expenses, half of the self-employment tax, possibly the qualified business income deduction, and costs like self-employed health insurance. Whether the total is higher depends on your expenses and income, which is why a quick projection is worth doing.
When are quarterly estimated taxes due for contractors?
Estimated payments are made four times a year on the schedule the IRS publishes with Form 1040-ES, and South Carolina follows a similar schedule for state estimates. The payment periods are not equal quarters, so check the form instructions for the current due dates. Paying late or too little can bring an underpayment penalty even if you pay everything when you file.
Can I deduct my health insurance as a 1099 contractor?
If you are self-employed with a net profit and you were not eligible for a subsidized health plan through an employer (including a spouse’s employer), you can generally deduct premiums for medical, dental and qualifying long-term care coverage for yourself and your family. The deduction is limited to your business profit and is taken on Schedule 1, not as an itemized deduction.
Should I form an LLC when I become a contractor?
An LLC is a legal choice more than a tax one. A single-member LLC is taxed the same as a sole proprietor by default, on Schedule C. It can help separate business and personal liability and finances. An S corporation election is a separate tax decision that only makes sense once profit is steady enough to justify payroll and extra filings.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
Related pages
You started a side hustle
Side income next to a W-2: Schedule C, self-employment tax, expenses and estimated payments.
Learn moreYou changed jobs
Two W-2s, an old 401(k), a bonus and withholding that may not fit anymore.
Learn moreYou lost your job
Unemployment on a 1099-G, severance on a W-2, a cashed-out 401(k) and Marketplace coverage.
Learn moreYour business is growing
How an S corp election saves tax, what it adds to your workload, and how to tell if your profit is there yet.
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