W-2 vs 1099: Understanding How You Get Paid (and Taxed)
Taxes · 12 min · Intermediate
Whether you're an employee, a contractor, or both, the form you get at tax time changes everything. Here's the math, the deductions, and what to set aside.
The form you get at tax time tells you which side of the labor line you're on.
Every W-2 paycheck has at least four deductions before you see the money. On a $1,000 gross check for a single filer claiming standard withholding:
A 1099 client pays you the full invoice. Nothing is withheld. But you still owe taxes — you're just paying them yourself, four times a year via 'estimated tax' payments.
Key takeaway: A W-2 has taxes taken out before you see the money. A 1099 doesn't — which means about 25–30% of every payment isn't actually yours. Set it aside the moment it lands or you'll owe a painful bill in April.
Questions people ask
What's the threshold for getting a 1099?
Starting in 2024, clients must issue a 1099-NEC if they paid you $600+ for services. Even if you don't get a form (e.g., earned $400), you still legally owe tax on the income.
Do I have to file taxes if I made $5,000 freelancing?
Yes. The self-employment filing threshold is $400/year (way lower than the W-2 threshold of $14,600). Below $400 you can skip filing — above it, you owe SE tax even if income tax doesn't apply.
Can I write off my entire phone and internet?
Only the percentage used for business. If you use your phone 50% for client calls and 50% for personal, deduct 50% of the bill. Be honest — the IRS audits these in the rare case they audit.
What if a client doesn't send me a 1099?
You still owe tax. The IRS doesn't care whether you got the form — they care whether the income was reported. Track every payment yourself.
Are gig apps like DoorDash and Uber 1099?
Yes. They issue a 1099-NEC (if you earned $600+) or 1099-K (if you had 200+ transactions and $20k+, lowering to $5k in 2024). Either way, you owe self-employment tax on the net income after expenses.
How do quarterly estimated payments work?
Four times a year (April 15, June 15, September 15, January 15) you send the IRS roughly 25% of your projected annual tax bill. Pay free through IRS Direct Pay or the IRS2Go app.