Contractor vs Employee Calculator (W-2 vs 1099 Tax Comparison)

A $100,000 salary and a $100,000 contract are not the same money. As a W-2 employee you pay 7.65% in FICA tax while your employer quietly pays the other half; as a 1099 contractor you pay the full 15.3% self employment tax yourself. Social Security plus Medicare, computed on 92.35% of net earnings per IRS Schedule SE, while funding your own health insurance, retirement and time off. The popular "contractors need 30 to 40% more" rule of thumb is directionally right but uselessly vague for your specific numbers. This contractor vs employee calculator models both paths honestly: W-2 after tax keep plus employer benefits (health plan, 401(k) match, paid time off) against 1099 billings minus business expenses, self employment tax, income tax on net earnings after the half SE deduction, and self paid health costs. It then solves for the breakeven 1099 hourly rate, the exact rate where the contract matches the job, and shows your quarterly estimated tax set aside.

Last updated: October 22, 2026

Written by Ateeq Fareedi · Last updated October 22, 2026

The formula

Self employment tax = net earnings × 92.35% × 15.3% (below the Social Security wage base)
Half of self employment tax is deductible from income tax on IRS Schedule 1
W-2 total value = salary − employee FICA (7.65%) − income tax + benefits value
1099 keep = billings − business expenses − self-employment tax − income tax − self-paid health costs
Breakeven 1099 rate = the hourly rate where 1099 keep equals the W-2 total value

A worked example

$100,000 W-2 salary with $15,000 of benefits: after 7.65% FICA and a 22% effective tax rate, keep is $70,350, $85,350 of total value. A $75/hr 1099 contract at 40 billable hours × 48 weeks = $144,000 billings; minus $5,000 expenses, $19,640 self employment tax, income tax and $9,000 health costs → about $81,940 kept. The W-2 job wins by roughly $3,410, the contract only breaks even near $77/hour.

More about the Contractor vs Employee Calculator

Self employment tax, in plain English

W-2 employees pay 7.65% of wages into Social Security and Medicare, and their employer matches it invisibly. Contractors pay both halves, 15.3%, on 92.35% of net self employment earnings (the 0.9235 factor is the IRS's way of matching the W-2 base, where employer FICA never counts as wages). Above the Social Security wage base only the 2.9% Medicare portion continues.

One detail softens the blow: half of your self employment tax is deductible "above the line" on Schedule 1, cutting your income tax. And many contractors also qualify for the 20% qualified business income (QBI) deduction. This calculator models the half SE deduction; it keeps QBI out, since eligibility depends on your income and business type, talk to a tax professional before counting it.

The benefits gap: pricing what the W-2 job gives you

The tax gap is the smaller half of the story. A W-2 job typically bundles employer paid health insurance ($7,000, $18,000 a year for a family plan), a 401(k) match (often 3 to 6% of salary), paid time off, and eligibility for unemployment insurance and workers' compensation, none of which a 1099 contract includes. Add their cash value in the benefits field; ignoring them is how contractors accidentally take pay cuts.

Contractors replace these out of pocket: marketplace health insurance, a Solo 401(k) or SEP IRA for retirement (which actually allow larger contributions than employee 401(k)s), and zero paid sick days. Enter your self paid health cost honestly. It is usually the biggest single line item.

Reading the breakeven rate

The breakeven 1099 rate is the contract rate where both paths keep exactly the same money per year. If an offer sits above it, the contract pays more; below it, the W-2 job does. As a sanity check against the example above, a $100,000 salary with $15,000 of benefits breaks even near $77/hour at 40 billable hours × 48 weeks, a multiplier of roughly 1.6× the W-2 hourly equivalent, which is where the "30 to 40% more" folk wisdom comes from.

Note what moves it: fewer billable weeks (unpaid gaps between contracts), higher health costs, and bigger benefits packages all push the breakeven rate up. If you are comparing a contract against a salary with golden benefits, expect the multiplier to land near 1.7 to 2×.

Quarterly taxes and the cash flow trap

The cruelest surprise for new contractors is not the tax bill. It is the timing. W-2 tax is withheld painlessly from every paycheck; contractors must send quarterly estimated payments (April, June, September, January) and can face underpayment penalties if they skip them. The quarterly set aside row shows exactly how much of each three months' income to park in a separate account.

A practical rule: move 25 to 30% of every invoice into a tax account the day it is paid. And if the contract versus salary question keeps coming up in your career, bookmark the <a href="/work-career-calculators/">Work & Career calculators</a> the <a href="/salary-vs-hourly-calculator/">salary vs hourly comparison</a> and the <a href="/freelance-rate-calculator/">freelance rate calculator</a> cover the neighbouring decisions.

Self employment tax on a $90,000 contract, line by line

Suppose a contract pays $90,000 over the year and you spend $6,000 on deductible business costs, software, equipment, travel and professional fees. Your net self-employment earnings are 90,000 − 6,000 = $84,000. The tax is not charged on the whole $84,000: it applies to 92.35 percent of it, which is 84,000 × 0.9235 = $77,574. At the full 15.3 percent rate, self-employment tax comes to 77,574 × 0.153 = $11,868.82 for the year.

Set that beside an employee on a $70,000 salary. The employee sees 7.65 percent taken from wages: 70,000 × 0.0765 = $5,355, and most never think about the second $5,355 the employer pays on top, money that never appears on the payslip at all. The contractor effectively pays both halves on their own earnings, which is the single biggest structural reason a contract rate has to sit well above the hourly equivalent of a salary to break even.

One line in that worked example is widely misunderstood. Half of the self employment tax, here 11,868.82 ÷ 2 = $5,934.41, is deductible, but it reduces your income tax, not the self employment tax itself, which stays at $11,868.82 in full. Contractors who mentally halve their self employment bill when setting aside money for quarterly payments under save by thousands and meet the difference, plus a possible underpayment penalty, at filing time.

The hours nobody pays you for

A salary quietly pays for days that produce nothing billable: public holidays, vacation, sick days and the slow week between projects. A day rate or hourly contract pays for none of them unless you build them into the rate. At $75 an hour and 40 hour weeks, a two week gap between contracts costs 75 × 40 × 2 = $6,000 of gross income, and a four week total of unpaid time across the year costs $12,000, before tax has taken anything at all.

Administrative time hides in the same place. Invoicing, chasing late payments, bookkeeping, marketing for the next contract and maintaining your own equipment are all working hours that a W-2 employer absorbs as overhead and a contractor absorbs personally. If five hours a week go to unpaid administration, only 35 of your 40 hours generate revenue, and a rate that looked adequate divided across 40 hours is actually being earned across a much more expensive week.

The calculator handles this honestly through its billable weeks and hours inputs, which is why small changes there move the breakeven rate so sharply. The common mistake is entering an ideal year, 52 weeks, every hour billed, for a working pattern no contractor actually lives. Enter the year you realistically expect, gaps, holidays and quiet admin included, and the comparison against the salaried offer becomes one you can defend.

Staying a sole proprietor or incorporating: what actually changes

As a sole proprietor, the arrangement behind this calculator applies directly: business profit flows onto your personal return, and self employment tax is charged on 92.35 percent of net earnings as worked through above. There is no payroll to run and almost no administration, which is why most people start here. The price of that simplicity is that every dollar of profit is exposed to the full self employment tax rate every year.

Electing to be taxed as an S corporation changes the machinery rather than the workload. You become an employee of your own company, draw a salary that carries the usual payroll taxes, and any remaining profit can pass through without self employment tax. The catch is twofold: the salary must be reasonable for the work you do, which is an IRS requirement rather than a suggestion, and payroll, filings and bookkeeping add real annual cost and effort.

Which structure wins depends on profit level, state rules and how much administration you are willing to run, so treat the calculator as the sole proprietor baseline and take entity questions to a tax professional with your actual figures. One boundary neither structure crosses: calling yourself a business does not settle worker classification. If a client controls your hours, tools and methods like an employer, the label on the contract is not what decides your status.

How to use the Contractor vs Employee Calculator

Enter the W-2 salary and the dollar value of its benefits, health plan, 401(k) match and paid time off.
Enter the 1099 hourly rate plus your realistic billable hours and weeks per year.
Add annual business expenses, self paid health insurance, and your effective income tax rate.
Press Calculate: compare after tax keep on both sides and read the breakeven 1099 rate.

Frequently asked questions

What is the fully loaded cost of an employee beyond salary?

Employers typically pay an additional 20 to 40% on top of base salary once payroll taxes, benefits, insurance, equipment and paid time off are included. This calculator builds those employer side costs in so the comparison against a contractor's day rate is on equal terms, always compare total cost, not headline pay.

How much more should a 1099 contract pay compared to a W-2 salary?

The old rule of thumb says 25 to 40% more, and it exists for good reasons: self employment tax costs roughly double FICA, and contractors fund their own health insurance, retirement and time off. But the honest answer depends on your benefits and billable weeks, run your numbers above and use the breakeven rate, not folklore.

What is self employment tax and how is it calculated?

Self employment tax is Social Security (12.4%) plus Medicare (2.9%), 15.3% total, applied to 92.35% of your net self employment earnings. You pay both the employee and employer halves, unlike W-2 workers who pay only 7.65%. Half of the tax is deductible from your income tax.

Can 1099 contractors deduct business expenses?

Yes, and it is one of contracting's real advantages. Home office, equipment, software, professional insurance, business mileage and health insurance premiums all reduce your taxable net earnings on Schedule C. Track everything from day one; undocumented expenses are deductions you simply lose.

Does this calculator work outside the US?

The self employment tax model is US specific (IRS Schedule SE). The comparison logic, billings minus costs versus salary plus benefits, still works anywhere if you adjust the tax inputs: UK contractors face IR35 and National Insurance rules, Canadians use CPP/EI, Australians handle superannuation. Treat results as a starting framework, not tax advice.

Do my business expenses reduce self employment tax, or only income tax?

Both, because self employment tax is charged on net earnings, which means profit after deductible business expenses. On a $90,000 contract, $6,000 of legitimate expenses cuts the tax base from $90,000 to $84,000 before the 92.35 percent factor is even applied, saving roughly $848 of self employment tax alone at 15.3 percent, on top of the income tax saving. Keep receipts: an unsupported expense helps neither calculation when questioned.

How does unpaid time off change my real hourly rate as a contractor?

It divides your income by the same calendar while paying you for fewer weeks. At $75 an hour, 40 hours a week, four unpaid weeks across the year, holidays, illness and gaps, remove 75 × 40 × 4 = $12,000 of gross billings. A salaried colleague keeps being paid through those weeks. This is why the calculator asks for realistic billable weeks rather than 52, and why honest inputs push the breakeven rate up.

Can I put more into retirement as a contractor than as an employee?

In structure, yes. An employee contributes to a workplace plan from salary, sometimes with an employer match. A contractor using a Solo 401(k) or SEP IRA can contribute on both sides of the arrangement, as the contributing worker and as the business, which can allow a larger total than an employee plan on the same income. The trade off is that every dollar is funded by you, and contribution rules and limits need checking for your situation and year.

Are my health insurance premiums deductible as a contractor?

Generally, self employed people may be able to deduct the premiums they pay for their own health coverage when working out income tax, subject to eligibility rules, for example, the deduction interacts with any coverage available through a spouse’s employer. It does not reduce the earnings that self employment tax is charged on, which is why the calculator treats your health cost as a real expense in the comparison rather than assuming the deduction makes it disappear.

A client offers to convert my contract into a W-2 job at a lower headline salary. How do I compare fairly?

Compare kept value, not headlines. Add the employer funded benefits, paid time off and the employer half of payroll tax to the salary side, then set that total against what the contract leaves after self employment tax, self paid health cover, expenses and unpaid weeks. A salary that looks 20 percent lower can easily win once those lines are priced, which is exactly the comparison the calculator performs. Run both offers with the same honest assumptions before you negotiate.

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