1099 vs W-2 Calculator
Compare a contract rate against a salary on equal terms for 2026 — self-employment tax, lost benefits and deductible expenses included — and find the 1099 rate that truly matches.
How to use this calculator
- 1Enter the salary on offer and a realistic value for the benefits attached — employer health premiums, retirement match and paid leave.
- 2Enter the contract rate and, importantly, the hours you will actually bill rather than a full 2,080.
- 3Add the business expenses you would genuinely deduct as a contractor.
- 4Compare against the break-even rate: that is the hourly figure at which the contract truly matches the job.
How the calculation works
W-2 value = salary − FICA − income tax + benefits. 1099 value = (rate × hours − expenses) − SE tax − income tax. Break-even rate solves 1099 value = W-2 value- FICA
- The employee half only — 7.65% up to the wage base, the employer pays the other half
- SE tax
- Both halves, 15.3% on 92.35% of profit, because a contractor is both employer and employee
- benefits
- What the employer provides that a contractor must buy: health cover, retirement match, paid leave
The comparison only means anything if benefits are valued. Employer-paid health insurance and a retirement match are real compensation, and ignoring them makes almost any contract rate look better than it is.
Billable hours matter as much as the rate. A contractor billing 1,600 hours at $100 earns less than an employee on $170,000, before the tax difference is even considered.
The break-even rate is solved numerically rather than by formula, because self-employment tax and the income brackets both change as the rate moves.
Worked example
$120,000 salary against $85 an hour
- 1.The contract grosses $85 × 1,800 = $153,000, less $4,000 of expenses = $149,000 of profit.
- 2.Self-employment tax at 15.3% on 92.35% of that is roughly $21,000 — around double the employee FICA on the salary.
- 3.The salary is worth $120,000 plus $15,000 of benefits, and only the employee half of FICA is deducted.
- 4.Once both are taxed properly, the headline gap between $153,000 and $120,000 narrows sharply.
Result: Much closer than the headline numbers suggest
Why contract rates have to be higher, not just a bit higher
The instinctive comparison — $85 an hour is about $176,000 a year, so it beats a $120,000 salary — fails on three counts at once, and each is substantial.
First, self-employment tax. An employee pays 7.65% of wages in FICA and the employer quietly pays another 7.65%. A contractor pays both halves, 15.3%, on 92.35% of profit. That difference alone is worth several thousand dollars a year at typical professional incomes.
Second, benefits. Employer-paid health insurance, a retirement match and paid leave are compensation that never appears on the salary line. Replacing them out of pocket is expensive, and health insurance on the individual market is the single largest item for most people.
Third, billable hours. The 2,080-hour year assumes every working hour is paid. Contractors lose time to holidays, illness, gaps between engagements, invoicing, chasing payment and finding the next client. Billing 1,700 to 1,800 hours is a realistic good year, and using 2,080 overstates contract income by roughly fifteen per cent before anything else is counted.
What contracting gives back
The comparison is not one-sided, and the advantages are real enough that the arithmetic often works out.
Deductible business expenses reduce taxable income in a way an employee cannot match — equipment, software, professional insurance, a home office, and travel between clients. Retirement contribution room is dramatically larger: a solo 401(k) allows both employee deferrals and employer contributions from the same business, far exceeding what a typical employee plan permits. The Section 199A deduction can exempt up to 20% of qualified business income from tax entirely. And rates can be raised, multiple clients carried, and work turned down — options an employee does not have.
The honest summary is that contracting is worth more than a salary at the same nominal figure only once the rate is meaningfully higher, and it carries risk that no calculator prices: no unemployment insurance, no guaranteed pipeline, and full exposure to a client deciding to stop.
What this assumes, and where it stops
Assumptions
- Federal tax only, using the 2026 schedule and the standard deduction.
- The benefits figure is what you would have to spend to replace what the employer provides.
- Business expenses are fully deductible against self-employment income.
- The QBI deduction is not applied — including it would improve the contract side further where it is available.
Limitations
- State income tax is not modelled and can shift the comparison, particularly where a state taxes business income differently from wages.
- The Section 199A deduction of up to 20% of qualified business income is excluded, so the contract side is shown conservatively.
- Retirement contribution room differs enormously between the two and is not valued here.
- Non-financial factors — job security, unemployment cover, client concentration risk — are not priced and often decide the answer.
Common questions
What hourly rate equals my salary?
A common shorthand is to take the salary, divide by 2,080 hours and add 25–35%. This calculator does it properly by solving for the rate at which contract take-home equals the salary plus its benefits, using real 2026 brackets and self-employment tax. The result is usually higher than people expect, because it accounts for both halves of FICA, lost benefits and the hours you will not bill.
Why is self-employment tax so much higher than the FICA on my payslip?
Because you are paying both sides. An employee sees 7.65% deducted and the employer pays a matching 7.65% that never appears on the payslip. A contractor is both parties, so the full 15.3% applies — on 92.35% of net profit, a small reduction that mirrors the fact employees do not pay FICA on the employer half either. Half of what you pay is then deductible against income tax.
How many billable hours should I assume?
Considerably fewer than 2,080. That figure assumes fifty-two forty-hour weeks with no holidays, no illness, no gaps between contracts and no unpaid time spent invoicing, chasing payment or finding work. Most established contractors bill somewhere between 1,600 and 1,800 hours in a good year. Using 2,080 overstates contract income by around fifteen per cent and is the most common error in this comparison.
Sources
- Independent Contractor (Self-Employed) or Employee? — US Internal Revenue Service
- Publication 334, Tax Guide for Small Business — US Internal Revenue Service
Formula and content last reviewed on .
Results are estimates for information only, not professional advice.
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