W-2 vs. 1099: what is the real difference?

A W-2 employee has taxes withheld each paycheck, the employer pays half of Social Security and Medicare, and labor protections plus any benefits attach. A 1099 contractor is a business of one: the full check arrives untaxed, and with it self-employment tax, both halves of Social Security and Medicare at 15.3 percent, income tax paid via quarterly estimated payments, and no employer benefits, unemployment insurance, or workers' comp.

The classic mistake is comparing rates one to one. A contractor dollar is worth meaningfully less than an employee dollar once you fund your own payroll taxes, health insurance, retirement, and unpaid time off, so the usual guidance is to price contract work well above the equivalent salary rate. Contractors do get deductions, home office, equipment, health premiums, and a solo 401(k)'s generous limits. Also, the classification is law, not preference: the IRS and Labor Department test control and independence, and misclassification is an employer problem with real penalties.