Contractor vs Employee Calculator

W2 employees work for a single employer who withholds taxes, provides benefits, and pays half of Social Security/Medicare taxes (7.65%). 1099 contractors are self-employed - they set their own rates and hours but must pay the full 15.3% self-employment tax, provide their own benefits, and handle their own taxes. Contractors typically need higher gross income to net the same as employees after accounting for these costs.

As a general rule, your contractor hourly rate should be 1.3x to 1.5x the equivalent W2 hourly rate to break even. For example, if a job pays $50/hour as an employee ($104K salary), you'd need $65-75/hour as a contractor. This covers the extra 7.65% self-employment tax, health insurance costs, lack of paid time off, retirement match, and business expenses. Our calculator provides exact numbers for your situation.

Contractors face several hidden costs: 1) Self-employment tax - the extra 7.65% employer portion of FICA (Social Security + Medicare). 2) Health insurance - often $500-800/month for a family without employer subsidy. 3) Retirement contributions without matching - employees often get 3-6% free match. 4) No paid time off - vacation time is unpaid. 5) Business expenses - software, equipment, liability insurance, accounting fees. 6) Unpaid non-billable hours - admin, marketing, invoicing.

Employee benefits can add 20-40% to base salary in value: 1) Employer-paid health insurance ($6,000-15,000/year value). 2) 401(k) match (3-6% of salary). 3) Paid time off (2-4 weeks + holidays = $4,000-12,000 value). 4) Life and disability insurance. 5) Dental and vision coverage. 6) Education reimbursement. 7) Stock options or RSUs. 8) Gym memberships, commuter benefits, etc. The calculator accounts for all these factors.

Check your benefits statement or HR portal for exact numbers. For health insurance, find the 'employer contribution' (often $500-1500/month). For 401k match, multiply your salary by the match percentage (e.g., $100K × 4% = $4,000). For PTO value, divide salary by 260 working days and multiply by PTO days. Add dental/vision (usually $50-100/month), life insurance, and any other perks. Most employees underestimate their total compensation by 20-30%.

Self-employment tax is 15.3% on net self-employment income - it covers Social Security (12.4%) and Medicare (2.9%). As an employee, you pay half (7.65%) and your employer pays half. As a contractor, you pay both halves. You can deduct half of SE tax from your taxable income, and it's calculated on 92.35% of net earnings. For high earners, the 12.4% Social Security portion caps at $160,200 (2023), but the 2.9% Medicare continues on all income.

An LLC provides liability protection but doesn't change tax treatment - you still pay full self-employment tax. An S-Corp can reduce SE tax if you earn over $80-100K: you pay yourself a 'reasonable salary' (which has SE tax) and take remaining profit as distributions (no SE tax). The savings can be $5,000-15,000/year, but you'll have added complexity, payroll costs, and must pay yourself consistently. Consult a tax professional for your specific situation.

Most contractors can bill 30-35 hours per week on average, not 40. The remaining time goes to: finding work, invoicing, admin tasks, professional development, and marketing. Plan for 1,500-1,800 billable hours per year (vs. 2,080 for a full-time employee). Also factor in unpaid time off - most contractors take 2-4 weeks vacation plus sick days. Our calculator uses weeks per year to account for this.

Common deductible business expenses include: home office (dedicated space), computer and equipment, software subscriptions, professional liability insurance, accounting and legal fees, business travel, professional development, health insurance premiums (special deduction), cell phone (business portion), internet (business portion), coworking space, and retirement contributions (SEP-IRA or Solo 401k). Keep detailed records and receipts for all deductions.

Contracting often makes sense when: 1) Your rate is 1.4x+ equivalent salary. 2) You have access to spouse's health insurance. 3) You value flexibility over stability. 4) You're in a high-demand field with steady work. 5) You're building toward your own business. It may not make sense when: 1) Rate difference is small. 2) Benefits are excellent (good insurance, high 401k match). 3) You value job security. 4) Work is inconsistent. 5) You dislike admin/business tasks.