“Contract” and “full-time” describe how long a job is meant to last. W-2 and 1099 describe who handles the taxes. A full-time employee and a W-2 contractor are both employees: tax is withheld from each paycheck, and the employer pays half of the Social Security and Medicare taxes. A 1099 contractor is self-employed, pays both halves, arranges their own benefits and is not covered by federal minimum wage or overtime rules.
Before you compare a contract offer with a salary, find out which kind it is and what the rate has to cover that a salary would not.
Key takeaways
- Ask two separate questions about any contract role: how long it lasts, and whether you will be paid on a W-2 or a 1099.
- Social Security and Medicare taxes total 15.3% of pay. An employer pays half for a W-2 worker. A 1099 contractor pays all of it.
- Federal minimum wage and overtime rules protect employees, including W-2 contractors, and not independent contractors.
- Your status depends on how the work is done. A job title, a 1099 or a signed contractor agreement does not settle it.
- Compare paid hours, taxes and benefits, not an hourly rate against a salary.
01
What do contract, full-time, W-2 and 1099 mean?
In this comparison, “full-time” means a permanent job as the company’s own employee, which postings also call FTE or direct hire. A contract role has an end date or a project scope, even when the hours are full-time, and it comes in two kinds named after the IRS forms that report your pay.
| What changes | Full-time employee | W-2 contractor | 1099 contractor |
|---|---|---|---|
| Who you work for | The company | Usually a staffing agency that places you with its client | Yourself. The company is your client |
| How long | No set end date | A set term, often extendable | A project or contract term |
| Income tax | Withheld from each paycheck | Withheld from each paycheck | Nothing withheld. You pay estimated tax during the year |
| Social Security and Medicare | You pay 7.65%, the employer pays 7.65% | Same as any employee | You pay the full 15.3% |
| Federal minimum wage and overtime | Covered, unless the job is exempt | Covered, unless the job is exempt | Not covered |
| Benefits | The employer’s plans | Whatever the agency offers | You buy your own |
The percentages come from the IRS: Social Security is 6.2% of wages and Medicare is 1.45%, each matched by the employer. The Social Security part stops at an annual earnings limit, $184,500 for 2026. Medicare has no limit.
Some recruiters also offer corp-to-corp, where your own business entity invoices theirs. For planning, treat it like the 1099 column.
02
How do the IRS and the Department of Labor decide who is an employee?
Two federal agencies ask the question for different purposes. Neither one starts with the paperwork.
The IRS, for tax purposes, weighs how much control and independence there is in the relationship, in three categories:
- Behavioral control. Does the company control, or have the right to control, what you do and how you do it?
- Financial control. Who controls the business side: how you are paid, whether expenses are reimbursed, who provides tools and supplies?
- Type of relationship. Is there a written contract? Are there employee-type benefits? Will the relationship continue, and is the work a key part of the business?
The IRS says no single factor settles it.
The Department of Labor, for minimum wage and overtime under the Fair Labor Standards Act, looks at economic reality: are you economically dependent on the employer for work, or in business for yourself? Its fact sheet is blunt about labels: what a worker is called is not relevant, and receiving a 1099 or signing an independent contractor agreement does not make someone an independent contractor. The fact sheet also notes that the department’s 2024 rule on this test is being challenged in court, so read the current version instead of an older summary.
03
How to compare a contract rate with a salary
Put the two on the same footing in four steps.
- Count the hours you will be paid for. A salary covers 2,080 hours a year (52 weeks of 40 hours), including vacation and holidays. A contractor is usually paid only for hours worked, so subtract holidays, vacation, sick days and any gap you expect between contracts.
- On a 1099, take off the second half of Social Security and Medicare. That is 7.65% of earnings up to the Social Security limit, which an employer would otherwise pay.
- Price what you would have to replace. Get a real quote for health insurance. Add the retirement match, bonus and paid leave from the salaried offer, and subtract business costs such as equipment, software and an accountant.
- Compare the totals, then the things with no price: how long the contract runs, whether it can convert, and the rest of what goes into evaluating a job offer.
Here is the method with invented numbers. Dana is choosing between a $95,000 salaried job and a one-year 1099 contract at $60 an hour.
| Step | Salaried offer | 1099 contract |
|---|---|---|
| Paid hours in a year | 2,080, with paid time off | 1,840 (46 weeks, time off unpaid) |
| Gross pay | $95,000 | $110,400 |
| Second half of Social Security and Medicare | Paid by the employer | Minus $8,446 |
| Health insurance | Mostly paid by the employer | Minus $6,000 (her own quote) |
| Retirement match | Plus $3,800 (a 4% match) | None |
| Comparable total | $98,800 | $95,954 |
At 2,080 hours the contract looks like $124,800 a year, almost $30,000 more than the salary. Counted properly, the two offers are close and the salaried one is slightly ahead. Your numbers will differ, which is the reason to run them. This is a rough comparison, not a tax calculation. To check whether either figure is competitive in the first place, see how to research salary for a job.
04
Taxes, overtime and security: what you trade
- Taxes. On a 1099, you generally have to make estimated tax payments in four installments through the year if you expect to owe $1,000 or more, and the IRS can charge a penalty if you pay too little.
- Overtime. Employees must receive at least the federal minimum wage, and at least one and a half times their regular rate for hours over 40 in a week unless an exemption applies. Independent contractors get what the contract says.
- Security. A business pays unemployment tax on its employees’ wages and generally pays no taxes on payments to independent contractors. Before you count on unemployment benefits between 1099 contracts, ask your state unemployment agency where you stand.
- Career value. A run of contracts builds range quickly but needs explaining on paper. See how to list freelance and contract work on a resume.
05
Questions to ask before you accept a contract role
Get the answers in writing before you agree to a rate. The first question changes the meaning of all the others.
Subject: Questions about the [job title] contract Hi [Name], Thanks for the details on the [job title] contract with [client]. Before I confirm a rate, could you clarify a few points? 1. Is this W-2 through [agency], or 1099? 2. What is the expected length, and is an extension or conversion possible? 3. Are hours over 40 a week paid, and at what rate? 4. Which benefits and paid days off apply, and when do they start? 5. How often am I paid, and how much notice ends the contract early? Best, [Your name]
If the answers change the math, say so and negotiate the rate before you sign, not after you start.
06
What to do if you think you are misclassified
Misclassification means being treated as an independent contractor when the facts make you an employee. It moves the employer’s share of Social Security and Medicare onto you and removes minimum wage and overtime protection.
- Write down the facts and raise them. Note who sets your hours, who supplies your tools and how long the arrangement has run, then ask the company or agency in writing. Sometimes it is a mistake that payroll can correct.
- Ask the IRS. Either the worker or the business can file Form SS-8 for a ruling on your status, which the IRS says can take at least six months. Workers who believe they were improperly classified can use Form 8919 to report the employee’s share of uncollected Social Security and Medicare taxes.
- Ask about unpaid wages. The Department of Labor’s Wage and Hour Division runs a toll-free helpline at 1-866-487-9243.
FAQ
Frequently asked questions
Is a contract job W-2 or 1099?
It can be either. A contract through a staffing agency is usually W-2: the agency is your employer, withholds your taxes and pays its share of Social Security and Medicare. A contract you hold directly with a company as a freelancer or consultant is usually 1099, which makes you self-employed.
Do 1099 contractors pay more tax than employees?
They pay more of the Social Security and Medicare taxes. Those total 15.3%: an employee pays half and the employer pays the other half, while a self-employed person pays all of it as self-employment tax and can deduct the employer-equivalent part when figuring adjusted gross income. Contractors also pay their own income tax in estimated payments during the year.
Does signing an independent contractor agreement make me a contractor?
No. The US Department of Labor says that agreeing to be classified as an independent contractor, verbally or in writing, does not make you one under the Fair Labor Standards Act. Neither does receiving a 1099. What counts is whether you depend on the employer for work or run your own business.
Is a contract-to-hire job worth taking?
It can be, if the conversion is real. Ask how many people on the team have converted, what the decision depends on and when it is made. Judge the contract period on its own terms, because conversion is not guaranteed, and keep your search warm until you have a written offer.
Sources
- IRS: Independent contractor (self-employed) or employee?: the three categories of evidence, what a business withholds and pays, Forms SS-8 and 8919.
- IRS: Self-employment tax (Social Security and Medicare taxes): the 15.3% rate and the deduction for the employer-equivalent portion.
- IRS: Topic no. 751, Social Security and Medicare withholding rates: the employee and employer rates and the 2026 wage base.
- IRS: Estimated taxes: who makes estimated payments, when, and the underpayment penalty.
- US Department of Labor: Fact Sheet 13, Employee or Independent Contractor Classification Under the FLSA: the economic reality test, minimum wage and overtime, why labels do not decide status, and the helpline.
Published by Jobbie and last updated on October 6, 2026. This guide is general information for job seekers, not legal, tax or financial advice. Spotted something wrong? Tell us.