If you're doing contract work, the first question isn't "what's the rate?" It's "what's the structure?" The same hourly number means very different things depending on whether you're W-2, 1099, or Corp-to-Corp. Most contractors learn this the hard way, usually around April.
W-2 Contractor
You're placed through a staffing agency. The agency is your employer of record. They handle payroll, withhold federal and state taxes, pay the employer side of FICA, and may offer limited benefits. Your paycheck looks like any other job: gross pay minus taxes and deductions equals net.
Pros: Taxes are handled for you. No quarterly estimates. Unemployment insurance eligibility. Sometimes health insurance or a basic 401(k) through the agency.
Cons: The agency takes a markup, typically 30–50% of what the client pays. Your rate is lower to account for this. Fewer deductions available since you're an employee.
1099 Independent Contractor
You contract directly with the client (or through an agency that classifies you as 1099). No taxes are withheld. You receive the full gross amount and are responsible for paying federal income tax, state income tax, and self-employment tax (15.3% on 92.35% of net earnings, covering both the employer and employee sides of Social Security and Medicare).
Pros: Higher gross rate. Full access to business deductions, home office, equipment, mileage, health insurance premiums. Ability to deduct half of SE tax from adjusted gross income.
Cons: You pay both sides of FICA (the employer portion is invisible as a W-2 but very visible as a 1099). Quarterly estimated tax payments required. No unemployment, no employer benefits.
Corp-to-Corp (C2C)
The client pays your LLC or S-Corp instead of paying you directly. You set up a business entity, invoice the client, and pay yourself a salary from the entity. The S-Corp structure can reduce self-employment tax at higher income levels because only your salary (not distributions) is subject to FICA.
Pros: Potential SE tax savings at income above ~$80,000. More deduction flexibility through the business entity. Professional credibility with enterprise clients. Pass-through tax treatment with an S-Corp election.
Cons: More administrative overhead, LLC formation, S-Corp election, payroll service, separate business bank account, annual filings. A CPA is essentially required. Only makes financial sense above a certain income threshold.
Rate Equivalency Table
The same hourly rate doesn't produce the same take-home across structures. Here's an approximation for a single filer with no state income tax:
| Annual Equivalent | W-2 Take-Home | 1099 Take-Home | C2C (S-Corp) Take-Home |
|---|---|---|---|
| $80,000 | ~$62,000 | ~$56,800 | ~$58,500 |
| $120,000 | ~$90,000 | ~$83,400 | ~$87,000 |
| $160,000 | ~$116,000 | ~$108,000 | ~$115,500 |
Notice: at $80K, W-2 wins. At $120K, C2C starts pulling ahead of 1099. At $160K, C2C is significantly better than 1099 and comparable to W-2, but with more deduction opportunities.
Use our 1099 vs W2 Calculator to run the numbers at your specific rate. The structure you choose should be driven by the math, not by what the recruiter suggests.
One rule of thumb: if a client offers you a 1099 rate that's less than 30% above the W-2 equivalent, you're probably losing money on the deal once you account for SE tax, benefits, and administrative costs. Know your number before you negotiate.