If you’re self-employed or working as a freelancer, you’ve likely come across the terms “1099 employee” and “W-2 employee.” But what do they mean, and how do they impact your taxes, deductions, and overall earnings?
The biggest difference between 1099 vs W-2 workers is how they handle taxes. If you’re a 1099 employee (also known as an independent contractor), you’re responsible for paying your own taxes. If you’re a W-2 employee, your employer handles tax withholding for you.
In this guide, we’ll break down the key differences between 1099 vs W-2 employment, how taxes work for independent contractors, and how to maximize your tax deductions.
A 1099 employee (also called an independent contractor) is a self-employed worker who provides services to a business but is not considered an employee. Instead of receiving a W-2 form, 1099 workers receive a 1099-NEC tax form from their clients to report their earnings. Unlike W-2 employees, 1099 contractors work as independent professionals, meaning they handle their own taxes, benefits, and business expenses.
If you’re a freelancer, gig worker, consultant, or independent service provider, you’re likely considered a 1099 contractor by the IRS.
Short answer: it's not! As a 1099, you're independent and not an employee of anyone but your own labor. If you’re a freelancer, gig worker, consultant, or independent service provider, you’re likely considered a 1099 contractor by the IRS. If you work for yourself and control when, where, and how you work, the IRS classifies you as an independent contractor, not an employee.
Unlike W-2 employees who receive a salary or hourly wage, 1099 contractors are typically paid per project, hourly, or on a contract basis. Payments may come through direct deposit, check, invoicing systems, or payment apps like PayPal or Venmo.
Businesses that pay $600 or more to a contractor during the year must provide a 1099-NEC form for tax reporting. However, all income must be reported to the IRS—even if a contractor doesn’t receive a 1099.
One of the biggest distinctions is how taxes are handled. W-2 employees have payroll taxes automatically deducted from their paychecks, while 1099 contractors must calculate and pay self-employment tax on their own. The ability to claim deductions is another major factor, 1099 contractors can deduct business expenses, such as mileage and equipment, while W-2 employees have limited deductions available.
Since taxes aren’t withheld from earnings, 1099 contractors must pay estimated taxes every quarter if they expect to owe $1,000 or more.
Missing payments can result in IRS penalties, so it’s crucial to estimate taxes accurately and pay on time. Estimated payments can be made online through the IRS website, by phone, or through the mail.
One of the biggest advantages of being a 1099 is the ability to deduct business expenses, reducing taxable income.
Mileage & Vehicle Expenses
Self-employed workers who drive for business can deduct mileage using the IRS standard mileage rate or actual expenses like gas and maintenance.
Home Office Deduction
If a portion of your home is used exclusively for work, you may deduct a percentage of rent, utilities, and internet expenses.
Equipment & Software
Computers, phones, and software used for business are deductible. If used for both personal and business purposes, only the business-related percentage is deductible.
Insurance Premiums
Independent contractors can deduct health insurance, business liability insurance, and cybersecurity insurance.
Marketing & Advertising
Website hosting, online ads, and client gifts (up to $25 per client) are deductible expenses.
Keeping detailed records of all expenses is key to maximizing tax deductions. Everlance makes this easy by automatically tracking expenses and mileage. Other expenses that independent contractors can deduct on their taxes include professional training and subscriptions, business travel, contributions to retirement savings, client gifts (up to $25) and more. It’s best to work with a tax professional to make sure you’re using all the tax deductions and credits you’re entitled to, which will help lower your total tax responsibility. It’s also important to keep accurate records of all your expenses and business mileage.
A W-2 job offers stability, with taxes handled by the employer and benefits often included. However, it also comes with fewer tax deductions. A 1099 contractor has the flexibility to set their own schedule and deduct business expenses, but must manage their own taxes and financial responsibilities.
For those transitioning from W-2 to 1099 work, keeping track of expenses is crucial. Tracking mileage, equipment purchases, and other deductible costs can significantly reduce tax liability.
The W-2 and 1099 are the tax forms for employees and contractors, respectively. A W-2 employee has less paperwork to handle, as their employer automatically takes taxes out of their paycheck. Conversely, a 1099 independent contractor is responsible in calculating what they owe in taxes.
A 1099 contractor must file an income tax return if their net earnings from self-employment were $400 or more. If your net earnings were less than $400, you'd still need to file if you meet any other filing requirements listed in the Form 1040 instructions.
If you’re self-employed or work as a contractor, using a mileage and expense tracking app like Everlance can help ensure you’re maximizing deductions and staying organized.
Over 4 million independent workers trust Everlance to track miles & expenses, maximize deductions, and take care of their self-employment taxes.
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Brad Thibeau is the Head of Growth & Partnerships at Everlance. Brad has worked at Everlance since 2021 with a focus on helping self employed people save time and money on their taxes.
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