W-2 vs. 1099: What Houston Taxpayers Should Know

Whether your income arrives on a W-2 or a 1099 changes a lot about how your taxes are prepared — what you report, what you can deduct, and how you plan your payments during the year. Understanding the difference helps you avoid surprises at filing time.

What a W-2 means

A Form W-2 reports wages paid to an employee. If you receive a W-2, your employer withheld federal income tax, Social Security, and Medicare taxes from your pay throughout the year and reported them to the IRS. As an employee, your employer handles half of your payroll taxes; you pay the other half through withholding.

For most W-2 employees, filing is relatively straightforward: you report your wages and the tax already withheld, claim any credits or deductions you're eligible for, and either receive a refund or owe the difference.

What a 1099 means

A Form 1099 reports income paid to you as an independent contractor or other non-employee. The most common for contractors is the 1099-NEC; other 1099s cover interest, dividends, and retirement distributions. When you receive a 1099, no taxes were withheld for you — you're responsible for the full amount.

This is the key difference: 1099 income means you owe both income tax and self-employment tax, and nothing was withheld during the year. That's why many self-employed taxpayers owe at filing time or make quarterly estimated payments.

Self-employment tax, explained simply

Employees and employers each pay half of Social Security and Medicare taxes. When you're self-employed, you pay both halves — this combined amount is called self-employment tax. It's calculated on your net business income and is separate from (and in addition to) income tax.

Deductions: where contractors have an edge

The trade-off is deductions. Employees generally can't deduct unreimbursed job expenses. Self-employed taxpayers, by contrast, can deduct legitimate business expenses — supplies, mileage, home office (where applicable), software, and other ordinary and necessary business costs — against their business income on Schedule C. These deductions reduce the income that's subject to both income and self-employment tax.

The important caveat: not every expense is deductible, and the rules differ by situation. We help you capture what's legitimately deductible without overreaching. See our self-employed filing page for more.

What if you have both?

Many Houston taxpayers have both — a W-2 job and a side business, or a W-2 plus freelance income. Both are reported on the same return. Your W-2 wages go on the front of your 1040, and your self-employment income and expenses flow through Schedule C. We coordinate both so your full picture is accurate.

Texas-specific note

Texas has no state income tax, so neither W-2 nor 1099 income is taxed at the state level. The federal differences above still apply in full. You won't file a Texas state return, but you'll still want your federal filing to reflect your income correctly.

This article is general educational information, not tax advice. Outcomes depend on your specific situation and the rules for the tax year.