Owner of Locums Tax PLLC Ben Nanney CPA, CFP, breaks down key differences between W-2 and 1099 financial and tax considerations.
For many of you reading this, you have experience working as a W-2 employee. If you are now considering a 1099 assignment, you may be wondering:
- What’s the difference?
- Why does it matter?
- Which is better?
Key differences between W-2 and 1099
Both W-2 and 1099 assignments involve tradeoffs, so it’s best to know what those tradeoffs are and make the decision that best fits what you’re looking for. Also, the type of medical professional you are affects the W-2 and 1099 assignment options you can choose from. For example, travel nursing assignments are usually W-2, mid-level locum assignments can be either W-2 or 1099, and physician locum assignments are typically 1099.
We’ll cover more details below, but here is a summary of the basic differences:
Based on these differences, here are some preferences to consider when comparing W-2 and 1099 assignments:
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Employee vs. contractor status
When you’re classified as an employee, income is reported on Form W-2 at the end of the year. When you’re classified as an independent contractor, your income is reported on Form 1099 at the end of the year.
IRS standards often dictate how you are paid. Some state laws also affect the classification. The main thing to remember is that you don’t normally have the option to choose your payment method. You’ll instead be offered the assignment, and the facility or agency paying you will decide whether you’ll be classified as an employee (W-2) or independent contractor (1099).
Longer vs. shorter term assignments
This doesn’t always hold true, but longer-term assignments with one group tend to be W-2, and shorter-term assignments tend to be 1099.
W-2 assignments
A real-life example is a regional group that offers full-time travel W-2 assignments for nurse practitioners. The full-time schedule included rotations in facilities throughout the multi-state region and was mostly known for the upcoming year.
1099 assignments
Most physician locum tenens assignments involve a contract to work at a specific facility for a specific period (usually 9 months or less). Before the assignment is completed, the process usually begins again to line up a new contract with a new facility. This allows for extended time off and more control of your work schedule.
Locum agencies can play a big role in lining up future assignments, and short-term assignments typically pay a higher hourly rate. However, if the uncertainty of knowing where you’ll work next is something you want to minimize, then W-2 assignments will typically offer longer-term options, although pay will again usually be less on an hourly basis in exchange for additional financial security.
Which agency to choose? Compare top locums agencies
Benefits provided vs. DIY benefits
Health coverage and retirement plans are usually offered with W-2 assignments (usually when full time, not PRN) but aren’t with 1099 assignments.
W-2 assignments
You’ll typically have at least one health insurance option and a 401(k) or 403(b) retirement plan. After you’ve made your choices, the payroll department will then withhold any amounts you owe for health coverage or your retirement contributions. Simple to choose, simple to pay.
1099 assignments
You’re responsible for your own health insurance and retirement. Options for health coverage include enrolling in your spouse’s plan or purchasing individual coverage through the Marketplace or a health insurance broker. Options for retirement plans include opening a solo 401(k) or SEP IRA.
Having benefits provided through a W-2 assignment is ideal if you have chronic health issues that limit your health coverage options or if you prefer a simple way to contribute to a retirement plan.
A 1099 assignment is ideal if you have other health coverage options and want to maximize your retirement contributions. You may be able to optimize your health coverage by selecting options such as a high-deductible health plan paired with an HSA. Also, if you’re interested in maximizing retirement plan contributions, opening a solo 401(k) can increase potential contributions (up to $72k in 2026 vs $24,500 with 401(k)/403(b) with a W-2).
Taxes withheld vs. DIY tax set-aside
Taxes can be a source of stress when working travel assignments, and how taxes are managed is much different between W-2 and 1099 assignments.
W-2 assignments
As an employee, taxes will be withheld with each paycheck and submitted to the government on your behalf by your employer’s payroll department. These withheld taxes include federal income, Social Security, and Medicare taxes. It can also include state and local taxes, based on both where you live and where your assignment is located. The advantages are that taxes are mostly handled before the paycheck hits your account and your employer pays 50% of your Social Security (6.2% up to $184,500 in 2026) and Medicare tax (1.45% with no earnings cap).
1099 assignments
There are typically no taxes withheld on your pay. This means that you are responsible for setting aside a portion of your pay for taxes that include federal income, Social Security, Medicare, and any state and local taxes. Since the group paying you isn’t an employer, you, as the independent contractor, owe 100% of the Social Security (12.4% up to $184,500 in 2026) and Medicare tax (2.9% with no earnings cap).
Four times per year, you pay estimated tax payments on the fifteenth of January, April, June, and September. These payments can usually be paid online. Estimated tax payments may also need to be made for state and local tax, depending on your situation. Failing to make estimated tax payments during the year can lead to large balances and underpayment penalties when filing your tax returns later.
Simpler tax vs. more complex tax situation
W-2 assignments keep your tax situation simpler in other ways as well, compared to 1099 assignments.
W-2 assignments
As a W-2 employee, you aren’t allowed to report unreimbursed expenses on federal and many state tax returns. So, items like unreimbursed travel, cell phone, licenses, membership fees, supplies, and accountant fees can’t be reported as expenses. This isn’t usually a disadvantage since many of the larger expenses (such as travel and licensing) are either provided or reimbursed by your employer.
Recordkeeping and tax returns are easier with W-2 assignments since they don’t involve business schedules, forms, or returns to complete. The biggest complexity typically arises when you work travel assignments in multiple states, though it will be less complex with a W-2 than a 1099. You will have to file tax returns, including federal and probably state, at the end of the year and may want to consider formal tax planning during the year, with accountant feeds likely ranging from $350 – $1,500 per year.
1099 assignments
As a 1099 independent contractor, you are by default a business owner, usually classified as a sole proprietor. This means you do not have to form an LLC to be considered a business and can deduct business expenses, with no additional formalities required from a tax perspective.
To report 1099 income and business-related expenses, you’re required to complete additional business schedules (Sch C being a common one), forms, and sometimes returns. To report 1099 income by state and to track expenses correctly as a business, you’ll need some form of recordkeeping. This ideally involves using separate checking and credit cards for business use only and setting up basic accounting using tools such as Excel or Xero.
Since the 1099 assignment income is business income, it qualifies for the Qualified Business Income Deduction (QBID). This allows for a potential 20% deduction based on qualified business income. There are a few moving parts to this calculation, including income limitations. Since W-2 income is employment income, not business income, it does not qualify for the QBID.
Because of the additional complexity with 1099 assignments, there is usually a greater need to work with an accountant throughout the year. The accountant can provide direction on retirement account options with potential contributions, track income and expenses each month, give recommendations to make estimated tax payments throughout the year, and file your tax returns at the end of the year.
These additional accounting services aren’t free, but they can provide value as back-office support and advice for you, which can free up your time and mental energy to do other things. Fees can vary depending on exact services, but year-round support will likely be in the range of an additional $3-6K per year (which can be treated as a business expense).
S corporation
Although not ideal for 1099 travel assignments, you can elect S corporation tax treatment. This decision involves a few calculations to determine if it makes sense for your circumstances, with more formalities and action items to address if it does. For this article, I’ll assume an S corporation isn’t chosen and tax is based on a sole proprietorship.
Questions about pay: How locum tenens pay works
Lower vs. higher hourly rate
If you’ve read this far, you may be asking why 1099 assignments should even be considered. The answer can be higher pay, leaving more money in your pocket.
With 1099 assignments, the group paying you (whether the agency or facility) has less responsibility. They’re not providing health insurance, a retirement plan, can usually terminate an assignment more easily, aren’t providing payroll services that include withholding tax for you, and don’t owe the 6.2% Social Security and 1.45% Medicare tax on the assignment payments to you.
Because they have less financial responsibility, the groups you work through have additional money to pass on as higher pay rates. The question then becomes how much higher the 1099 assignment pay rates should be for it to make sense for you. The answer depends on a few factors, but I would recommend looking for 1099 assignments that offer at least 20% more than similar W-2 assignments to offset the cost of being an independent contractor.
A practical example
A physician has a choice between a W-2 assignment that pays $100/hour and a 1099 assignment that pays $120/hour (20% more), both for 1,000 hours during the year. From a financial perspective, which assignment leaves more money in the physician’s pocket?
We’ll assume that the physician has no other income, all travel expenses are reimbursed, no retirement contributions will be made, and that the only major differences in expenses will be health insurance ($2K for W-2 with employee coverage vs. $8K for 1099), with additional accounting fees ($3,500) for the 1099 assignment. Here are the results:
Before taxes or expenses are accounted for, the W-2 assignment would pay $100,000 ($100/hour x 1,000 hours), and the 1099 assignment would pay $120,000 ($120/hour x 1,000 hours), offering $20,000 more gross income to the 1099 assignment.
The 1099 assignment’s $20,000 lead shrinks after subtracting for taxes (federal-related taxes only) and the additional $6,000 for health insurance ($2K vs. $8K), plus $3,500 for accounting fees, but would still leave more in the physician’s pocket. With an adjusted income of $82,513 compared to $77,773 with the W-2 assignment, the physician earns about $4,700 more with the 1099 assignment.
If the assignment paid $115/hour (15%), the 1099 assignment would only leave around $1,300 more in the physician’s pocket.
This example doesn’t factor in personal situations, assignment details, and available tax deductions for 1099s, like a home office or CME costs, which can lower the total amount of taxes you pay.
Want to save more? 7 tax deductions for 1099 physicians
What’s best for you: W-2, 1099, or both?
W-2 and 1099 assignments offer different mixes of financial and quality-of-life benefits (and costs). Think through your options, consider your financial and life goals, and move forward from there.
For some, the answer may mean both. I have worked with clients who had W-2 and 1099 assignments, and they usually enjoyed the combination of financial and other benefits. Many of these had at least part-time, long-term W-2 assignments that provided stability of income, which allowed them to be more selective on what 1099 assignments they chose to accept.
There are usually more opportunities than we initially realize. With research and networking, you’ll put yourself in a position to find these opportunities. Enjoy the journey!