1099 vs W-2 Calculator
Contracting pays a bigger number for the same work, and then takes some of it back. This prices both halves — the employer benefits you give up and the self-employment tax you take on — and solves for the rate that makes the two offers equal.
On this page
Where the money actually differs
Two things change when the same work moves from a W-2 to a 1099, and everything else is noise.
The first is payroll tax. An employee pays 7.65% of wages in Social Security and Medicare, and the employer pays a matching 7.65% that the employee never sees. A contractor pays both halves as self-employment tax — 15.3% on 92.35% of net profit up to the Social Security wage base, and 2.9% above it. Half of that is deductible against income tax, which softens it, but the cash still leaves.
The second is benefits. An employer contributing $13,500 towards health cover and $4,200 to a retirement match is paying $17,700 of real compensation that never appears in the salary figure. A contractor buys the same things from gross revenue.
Both are priced here. What is deliberately not priced is federal and state income tax, because it depends on your whole household return and is broadly similar under either structure at the same net income.
The rate that makes them equal
The common rule of thumb is to add 25 or 30 percent to a salary to get a contract rate. It is a reasonable first guess and it is not arithmetic.
The calculator solves for it properly. Self-employment tax applies to 92.35% of profit, so grossing up by a flat 15.3% understates what is needed; the required profit is target ÷ (1 − 0.9235 × 0.153), and business expenses are added on top of that to get the revenue figure. Divide by realistic billable hours and you have the rate to quote.
That last division matters more than people expect. A contractor billing 1,700 hours needs a materially higher rate than one billing 2,000 for the same annual income — and 2,080 billable hours is a fiction that ignores holidays, illness, and the weeks between contracts.
A worked example
A $105,000 salary with $13,500 of employer health cover, a $4,200 match, and $1,500 of other benefits, against a contract billing $150,000 with $12,500 of business costs and $11,000 of health insurance, at 1,700 billable hours.
The employed side is worth $124,200 in total compensation; after the employee's 7.65% FICA of about $8,033 the net position is around $116,167. The contract side nets $137,500 of profit, pays about $19,428 in self-employment tax, and buys $11,000 of insurance, leaving roughly $107,072.
On these figures employment is ahead by about $9,000. To match it the contract would need roughly $153,000 of profit — around $165,500 of revenue, or about $97 an hour across 1,700 billable hours.
What tilts it back towards contracting
Several real advantages are not modelled here, all of them favouring the 1099 side.
The deduction for one half of self-employment tax reduces adjusted gross income. Self-employed health insurance premiums are generally deductible above the line. The qualified business income deduction can reach 20% of eligible profit. And the retirement accounts available to the self-employed — a solo 401(k) or a SEP-IRA — allow far larger contributions than most employees can make.
None of those is universal and each has conditions, which is why they are named rather than assumed. If they apply to you they can close a gap of several thousand dollars, and a tax professional is the right person to size them.
This is not a classification test
Whether a particular role can lawfully be a 1099 role is a legal question with a legal answer, and it does not depend on what either party would prefer. The IRS applies common-law factors about behavioural control, financial control, and the relationship between the parties. The Department of Labor applies an economic-reality test under the Fair Labor Standards Act. States apply their own tests, some stricter than either.
Misclassification carries real consequences for both sides. Use this page to compare two offers you have; use a professional to decide whether a given arrangement is permissible.
What this does not cover
- Income tax. Federal and state income tax are excluded from both sides. The self-employment tax calculator and the federal income tax calculator handle those.
- Quarterly estimated payments. A contractor pays tax four times a year rather than through withholding, which is a cash-flow difference rather than a cost.
- Unemployment insurance. Contractors are generally not eligible.
- Risk. Contract income is less certain, and a contract can end without notice or severance.
- Autonomy. A real advantage of contracting, and not a number.
See our methodology for how these tools are built and tested.
Frequently asked questions
How much more should a 1099 rate be than a W-2 salary?
Enough to cover both halves of FICA, the benefits you lose, the business costs you take on, and the hours you will not bill. That is usually somewhere between 25% and 50% more, and the spread is wide because the benefits package matters as much as the tax.
Run your own figures rather than using a multiplier. The break-even revenue this page reports is the number to negotiate against.
What is self-employment tax and why is it 15.3%?
It is Social Security and Medicare for people without an employer to pay half. The employee and employer halves are 7.65% each; a contractor pays both.
It applies to 92.35% of net profit rather than all of it, which approximates the deduction an employer gets for its own share. Half of the resulting tax is then deductible against income tax.
Can I deduct my health insurance as a contractor?
Self-employed health insurance premiums are generally deductible above the line, subject to conditions — including not being eligible for an employer plan through a spouse.
This calculator charges the premium in full without applying the deduction, which makes the contracting side slightly pessimistic. That is the safer direction for a decision like this.
How many billable hours should I assume?
Fewer than you think. Take 2,080, remove holidays and vacation you would take, remove sick time, remove time spent selling and doing admin, and remove the gaps between contracts. Many independent contractors bill between 1,400 and 1,800 hours.
Assuming 2,080 is the single most common way to under-price a contract.
Does the qualified business income deduction change the answer?
It can, substantially. Where it applies it can deduct up to 20% of qualified business income, which is a large advantage for the contracting side.
It is not modelled here because eligibility depends on the type of business, your taxable income, and thresholds that need care. It is a specific question for a tax professional.
My employer wants to convert me from W-2 to 1099 for the same work. Is that allowed?
That is a classification question, and doing the same job under the same direction is one of the things that suggests employment rather than contracting.
The IRS and the Department of Labor both publish guidance, and states have their own tests. This calculator will tell you what such a switch costs you financially; it will not tell you whether it is lawful.
Related calculators
This is an estimated financial comparison for general educational purposes. It is not tax, legal, or employment advice, and it is NOT a worker classification test. Whether a role may lawfully be performed as an independent contractor is decided by the IRS common-law factors and the Department of Labor economic-reality test, not by which arrangement pays better.