🧾 Taxes, Demystified · Lesson 2 of 8 · 7 min
W-2 vs 1099
🧾 Two people make the identical $60,000. One coasts into spring. The other opens an envelope from the IRS and makes a sound only dogs can hear. The whole difference is one form: W-2 vs 1099.
💡 Key idea
W-2 = taxes withheld for you. 1099 = you owe it all yourself, plus extra self-employment tax.
🧠 Why it matters
A W-2 means you're an EMPLOYEE: your employer automatically withholds taxes from each paycheck and pays half of your Social Security/Medicare tax. A 1099 means you're an INDEPENDENT CONTRACTOR (freelancer, gig worker): nothing is withheld, and you owe the FULL self-employment tax yourself — so you must set money aside, often paying quarterly.
🌍 In the real world
💡 Do gig or freelance work (a 1099)? Stash ~25–30% of every payment for taxes the moment it lands. Contractors who skip this get blindsided in April by a bill on money they've already spent.
📌 Takeaways
- W-2 = employee, taxes withheld automatically
- 1099 = contractor, you owe the taxes yourself
- 1099 workers should reserve ~25–30% per payment
📖 Terms in this lesson
W-2: The yearly form from an employer showing what you earned and what tax was withheld.
1099: The yearly form for freelance or contract income, with no tax withheld, so you pay it yourself.
✅ Test yourself
With a W-2 job, who withholds your taxes?
- You, every quarter
- Your employer, automatically
- Nobody
- Your bank
Answer: B · Your employer, automatically
Employers withhold income and payroll taxes from each W-2 paycheck and send them in for you.
Why can 1099 contractors get a surprise bill?
- They're taxed twice
- Nothing is withheld, and they owe the full self-employment tax
- 1099 income is illegal
- They can't get refunds
Answer: B · Nothing is withheld, and they owe the full self-employment tax
No withholding plus the full self-employment tax means contractors must set the money aside themselves.
Smart habit for a freelancer?
- Spend it all, sort it out later
- Set aside ~25–30% of each payment for taxes
- Never pay taxes
- Only pay if audited
Answer: B · Set aside ~25–30% of each payment for taxes
Reserving a quarter to a third of each payment avoids the April shock.
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