How this page is reviewed
See methodology, assumptions & sources
| Risk tier | YMYL |
|---|---|
| Author | Calculover Editorial Team Finance education |
| Editorial owner | Calculover Tax & Payroll Desk Worker-classification methodology owner |
| Reviewer | Calculover Editorial Review Source and limitation review |
| Last reviewed | 2026-05-14 |
| Last verified | 2026-05-14 |
| Data effective date | 2026-05-14 |
Methodology
W-2 vs 1099 vs S-Corp compares take-home pay and total tax burden across the three classifications using user-entered gross income, deductible expenses, retirement contributions, health-insurance premiums, and state of residence. Self-employment tax, the QBI deduction, and reasonable-compensation rules are applied for the 1099 and S-Corp scenarios.
Assumptions
- Federal brackets and standard deduction reflect current IRS values; state rules use the user-selected state.
- S-Corp reasonable-compensation split is user-supplied; the calculator does not validate it against IRS audit criteria.
- Health-insurance, retirement, and home-office deductions assume the user qualifies under the relevant rules.
Limitations
- This comparison does not provide audit defense for worker classification or S-Corp salary positions.
- Multi-state, multi-entity, and equity-comp situations (RSUs, ESPP, stock options) require additional tax-professional analysis.
Sources
- Independent Contractor (Self-Employed) or Employee?, Internal Revenue Service
- S Corporation Compensation and Medical Insurance Issues, Internal Revenue Service
- Qualified Business Income Deduction, Internal Revenue Service
Professional guidance: This page is for worker-classification and tax education only and is not tax, legal, payroll, or fiduciary advice. Confirm classification, reasonable compensation, and deductions with a CPA or enrolled agent.
How Each Structure Works
W-2 Employee
As a W-2 employee, your employer withholds federal and state income taxes, Social Security (6.2%), and Medicare (1.45%) from every paycheck. Your employer matches the Social Security and Medicare portion, effectively paying half of your payroll taxes. Most W-2 positions include benefits like health insurance, retirement plans, and paid time off.
1099 Independent Contractor
A 1099 contractor is self-employed. You receive gross pay with no withholding and are responsible for paying the full 15.3% self-employment tax (both the employee and employer halves of Social Security and Medicare) plus income tax. You file quarterly estimated taxes and can deduct legitimate business expenses on Schedule C.
S-Corporation
An S-Corp is a tax election, not a business entity. You form an LLC or corporation, then elect S-Corp status with the IRS. As an owner-employee, you pay yourself a reasonable salary (subject to payroll taxes), then take remaining profits as shareholder distributions. Distributions are subject to income tax but not self-employment tax, which is where the savings come from.
The Self-Employment Tax Math
Understanding the SE tax difference is the key to choosing a structure. Assume you earn $120,000 in net self-employment income:
- 1099 sole proprietor: 15.3% SE tax on $120,000 = $18,360 in payroll taxes (plus income tax on the remainder).
- S-Corp with $60,000 salary: 15.3% payroll tax on $60,000 salary = $9,180. The remaining $60,000 in distributions is subject to income tax but no SE tax. Savings: roughly $9,180/year.
The S-Corp doesn't eliminate payroll tax entirely. It limits payroll tax to your reasonable salary, which the IRS requires to be comparable to what you'd earn in a similar W-2 role.
Setting an unreasonably low S-Corp salary to avoid payroll tax is one of the most common audit triggers. The IRS expects owner-employees to pay themselves a market-rate salary before taking distributions. Work with a CPA to determine the right salary amount.
Hidden Costs to Consider
1099 Hidden Costs
- Self-funded health insurance: $400–$700/month for individual coverage
- No employer retirement match: You fund 100% of your SEP-IRA or Solo 401(k)
- Quarterly estimated taxes: Miss a payment and face underpayment penalties
- No paid time off: Every vacation day is lost income
S-Corp Hidden Costs
- Payroll service: $30–$100/month (Gusto, ADP, or similar)
- Annual state filings: $50–$800 depending on state (some charge franchise tax)
- Tax preparation: $1,000–$2,500/year for S-Corp returns (more complex than Schedule C)
- Registered agent: $50–$300/year if required by your state