1099 vs W-2: Cost, Taxes and Rules for Employers (2026)

How much more does a W-2 employee cost than a 1099?

A W-2 employee on $60,000 costs $13,555 more a year than a contractor paid the same amount, in Texas in 2026: 8.1% of salary in employer payroll taxes and 14.5% in benefits.

The benefits line is the Bureau of Labor Statistics’ average private-industry spend on insurance and retirement, divided by wages plus paid leave, because a salary already pays for vacation days. A team with no health plan pays only the tax lines; a generous plan pays more.

The 1099 side only looks cheaper. The contractor carries those costs instead (self-employment tax, their own health cover, unpaid time off), which is why contractor rates run above salaries for the same work. A contractor fee up to $73,555 a year, or $35.36 an hour over 2,080 hours, costs you no more than this employee. To try your own salary and state, use the full 1099 vs W-2 calculator, or see what an employee really costs once workers’ comp and an employer of record are added.

Hiring your first W-2 employee means running payroll. For one employee, full-service payroll costs $36 a month on SurePayroll, $44 on Roll by ADP and $56 on Gusto Simple (published prices, checked October 23, 2026); see the cheapest payroll services we checked.

What taxes does each pay?

A W-2 employer pays 6.2% Social Security and 1.45% Medicare on wages, plus federal and state unemployment tax; for a 1099 contractor the employer pays none of these. The worker side mirrors it:

Self-employment tax is both halves of FICA paid by one person. On $60,000 of profit it comes to $8,478, and half of it is deductible from income. The self-employment rates above come from the IRS’s 2026 draft Schedule SE, so treat them as drafts until the final form is out. Social Security stops at the $184,500 wage base for both.

Do you have to file a 1099 if you made less than $20,000?

The payer files: a business must send Form 1099-NEC to any contractor it paid $2,000 or more during 2026, per the IRS instructions for Form 1099-NEC. The threshold applies to payments made after 2025 and may rise with inflation from 2027.

The contractor’s own duty is separate. Self-employment tax is due once net earnings reach $400 for the year, whether or not a 1099 arrives (2026 draft Schedule SE), so a worker earning less than $20,000 still reports it on their return.

Is a 1099 worth it?

For the worker, a 1099 at the same pay leaves less money than a W-2. On $60,000 with no business expenses, a single filer keeps $50,390 after federal tax as an employee and $47,011 as a contractor, $3,379 less. Matching the employee’s take-home takes $64,522 in 1099 receipts, before you replace health cover or paid time off.

A 1099 can still come out ahead: deductible business expenses cut both income tax and self-employment tax, and contractors set their own rates and clients. These figures count federal tax only and come from our 1099 vs W-2 engine on 2026 IRS rates; state income tax, where your state has one, lowers both sides.

Who decides if a worker is 1099 or W-2?

The IRS decides, by how the work is controlled, not by which form you pick. Its common-law rules weigh three things: behavioral control (do you direct how the work is done?), financial control (who pays expenses and carries the risk of loss?) and the relationship (benefits, permanence, a written contract). Some states apply their own, stricter tests.

Getting it wrong means back taxes and penalties for misclassification. If the answer isn’t clear, confirm it with a local employment lawyer or a CPA before the first payment.

What is an independent contractor agreement?

An independent contractor agreement is the written contract between your business and a contractor: the scope of work, the rate and how invoices are paid, the deadline, who owns the work product, and how either side ends it. The agreement documents the deal, but it doesn’t make someone a contractor; the control test above does. For workers outside the US, see how to pay international contractors.