Why do contractors pay more tax than employees?

Both halves of FICA. Employees pay 7.65 percent and the employer pays the matching 7.65 percent. Contractors pay the full 15.3 percent themselves, called self-employment tax.

Do contractors get pay stubs?

No. You get an invoice or direct payment. At year-end you receive Form 1099-NEC instead of a W-2.

How much should a contractor set aside for taxes?

A safe rule is 25 to 35 percent of gross, depending on income and state. Use Form 1040-ES to estimate.

Can I be both employee and contractor at the same time?

Yes. Many people are. You receive both a W-2 and a 1099. Combine on your return.

1099 Contractor vs W-2 Employee

Same work, different forms. A W-2 employee has tax withheld and benefits funded by the employer. A 1099 contractor handles all of that themselves. The cash difference is bigger than most people expect.

PayslipIQ provides educational information and estimated calculations only. It does not provide tax, legal, financial, accounting, employment, benefits, or payroll advice. PayslipIQ is not a CPA firm, law firm, financial advisor, payroll provider, or tax authority. Always verify your paycheck, deductions, withholdings, and tax position with your employer's payroll department, a qualified CPA, the IRS, your state tax authority, or another appropriately qualified professional. Calculations are estimates; your actual paycheck may differ based on factors specific to your employer, location, benefits elections, and personal tax situation.

The split

W-2 employees see federal tax, FICA, state tax and benefits taken out of every paycheck. The employer pays the employer-side FICA (6.2 percent SS plus 1.45 percent Medicare) on top, and usually subsidizes health insurance, 401(k) match, paid time off, unemployment insurance and workers' comp.

1099 contractors are self-employed. Nothing is withheld from gross receipts. You owe income tax plus self-employment tax (12.4 percent SS plus 2.9 percent Medicare equals 15.3 percent combined) on net earnings. You pay quarterly via Form 1040-ES estimated taxes. No employer benefits.

Self-employment tax in detail

You pay both halves of FICA, capped on the Social Security half by the same wage base ($184,500 for 2026, verify current). Plus 0.9 percent Additional Medicare above $200k single. You can deduct half of SE tax above the line on your federal return.

Retirement and benefits as a contractor

SEP-IRA, Solo 401(k) and SIMPLE IRA give you higher contribution limits than employee 401(k). You can deduct self-employed health insurance premiums above the line. Track every business expense you can substantiate.

Misclassification

If your employer treats you as a contractor but the work pattern looks like an employee, you may be misclassified. The IRS tests behavioral, financial and relationship control. Form SS-8 starts an IRS determination.

Frequently asked questions

Why do contractors pay more tax than employees?: Both halves of FICA. Employees pay 7.65 percent and the employer pays the matching 7.65 percent. Contractors pay the full 15.3 percent themselves, called self-employment tax.
Do contractors get pay stubs?: No. You get an invoice or direct payment. At year-end you receive Form 1099-NEC instead of a W-2.
How much should a contractor set aside for taxes?: A safe rule is 25 to 35 percent of gross, depending on income and state. Use Form 1040-ES to estimate.
Can I be both employee and contractor at the same time?: Yes. Many people are. You receive both a W-2 and a 1099. Combine on your return.