Worked example
An $80,000 job with $7,000 of health cover and a 4% 401(k) match is worth $75,310 after tax. A contractor with $3,000 of costs and four unpaid weeks off needs $99,655 a year to match it, which is $51.90 an hour, about 25% more than the salary.
What a W-2 job gives you that a contract doesn't
- Half of Social Security and Medicare. Your employer pays 7.65% on your wages. As a contractor you pay the full 15.3%.
- Benefits. Health insurance, a retirement match, paid time off, and often disability and life insurance.
- Equipment and costs. Laptops, software and training are on the employer.
A contract also brings real advantages: you can deduct business expenses, claim the qualified business income deduction, open a SEP-IRA or solo 401(k) with much higher limits, and set your own hours.
How the comparison works
The calculator works out the W-2 package after federal income tax and employee FICA, then adds the value of benefits. It then finds the contract revenue that leaves the same amount after self-employment tax, income tax and business costs, and spreads it over the weeks you will actually bill.
This treats benefits as costs you would pay yourself as a contractor. It does not include state tax, which affects both sides similarly.
Rules of thumb
Contract pay usually needs to be 25 to 40% above the equivalent salary to break even, more if the job has generous benefits. If a contract offers less than that, you are taking a pay cut in exchange for flexibility.
Are you really a contractor?
Worker status depends on how much control the business has over how, when and where you work, not on what the contract calls you. If you are treated like an employee, you may be misclassified. The IRS and Department of Labor both publish guidance, and Form SS-8 asks the IRS to decide.
Common questions
Is $50 an hour on a 1099 better than a $80,000 salary?
Often not by much. $50 an hour for 48 weeks of 40 hours is $96,000, but after paying both halves of FICA and your own benefits it may leave you about level with an $80,000 job. Use the calculator with your figures.
How do I convert a salary to a contractor rate?
A quick estimate is salary ÷ 2,080 × 1.3 to 1.5. The calculator gives a precise figure for your tax and benefits.
Do contractors get unemployment benefits?
Usually not, because no unemployment insurance is paid on their earnings. That is another risk to price in.
Can I deduct health insurance as a contractor?
If you are self-employed and not eligible for an employer plan, you can usually deduct premiums for yourself and your family as an adjustment to income.
Official sources: IRS: Independent contractor or employee?. This calculator gives estimates for planning, not tax advice. Read the disclaimer.