No withholding, no safety net
Contractors pay their own taxes.
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Taxes0/10
Marginal tax brackets, demystifiedTax credits versus tax deductionsStandard deduction or itemising?Sales tax, explained (and why your receipt total surprises you)Which receipts actually matter at tax timeShort-term and long-term capital gainsTax-loss harvesting, carefullyW-2 employee versus 1099 contractorCharitable giving and taxesWhen to hire a tax professional
W-2 employee versus 1099 contractor
Contractors pay both halves of Social Security and Medicare, make estimated payments and keep their own records.
In this lesson you will
- Compare W-2 and 1099 tax treatment
- Calculate self-employment tax
- Set up estimated payments and records
Employees receive a W-2; independent contractors and freelancers usually receive 1099 forms. The tax difference is large and often surprises new freelancers.
Withholding
Employers withhold income tax and payroll taxes from each paycheck. Contractors are paid in full and must pay their own taxes, usually through quarterly estimated payments.
Self-employment tax
Employees and employers split Social Security and Medicare taxes. The self-employed pay both halves — 15.3% on net self-employment earnings (12.4% Social Security up to a yearly wage cap, plus 2.9% Medicare) — and can deduct half of it.
Business expenses
Contractors can deduct ordinary and necessary business expenses, which lowers net earnings. That makes receipts and records essential.
Practical habits
- Set aside a share of every payment for tax in a separate account.
- Make quarterly estimated payments.
- Track business expenses as they happen.
- Consider a tax professional in your first freelance year.
Not tax advice — rules and amounts change; check IRS.gov or a tax professional.
By the GetGuac team · Editorial policy
Three ideas to keep
Both halves of payroll tax
15.3% self-employment tax.
Records lower tax
Business expenses reduce net earnings.
Do it in 4 steps
Open a tax savings account
Separate from spending.
Move a share of each payment
The day it arrives.
Calendar quarterly deadlines
Estimated payments.
Tag business receipts weekly
With purpose.
Self-employment tax on $40,000 net earnings
Simplified: the IRS applies 15.3% to 92.35% of net earnings.
| Step | Amount |
|---|---|
| Net self-employment earnings | $40,000 |
| × 92.35% | $36,940 |
| × 15.3% self-employment tax | $5,651.82 |
| Half deductible | $2,825.91 |
This is before income tax — which is why setting money aside from every payment matters.
Where this usually goes wrong
- Spending the whole payment
- Missing quarterly estimates
- Not tracking business expenses
If you freelance, open a separate account and move a fixed share of your next payment into it.
Tools and guides for this lesson
Quick quiz
1. Who usually has taxes withheld from pay?
2. Self-employment tax rate on net earnings is…
3. Contractors usually pay taxes…
0 of 3 answered
Puzzle
Using the simplified method, what is self-employment tax on $20,000 of net earnings?
Show the answer
About $2,825.91
$20,000 × 0.9235 = $18,470. × 0.153 = $2,825.91.