1099 vs W-2 offer comparison

Why the same number is worth less as a 1099

A $100,000 salary and a $100,000 contract are not comparable offers, and the gap is larger than most people expect.

You pay both halves of payroll tax

As an employee you pay 7.65% in Social Security and Medicare, and your employer pays another 7.65% on top of your salary. You never see their half — it does not appear on your payslip, and most people do not know it exists.

As a contractor you pay both, as self-employment tax: 15.3% of 92.35% of your profit. That single difference is worth roughly 7% of the headline figure before anything else is counted.

Benefits are worth more than people estimate

The employer contribution to health insurance is the big one — commonly $8,000–$20,000 a year for family cover, and completely invisible in the salary number. Add a retirement match, paid leave, disability cover and equipment, and a benefits package frequently runs 20–30% of salary.

As a contractor you buy all of it yourself, from taxed income, usually at worse individual-market rates.

Paid time off is real money

A salaried job pays you for holidays, public holidays and sick days. Four weeks off plus ten public holidays is roughly six weeks — about 12% of the year — that a contractor simply does not earn.

That is not modelled above, because it depends on whether your contract is hourly or a fixed annual value. If it is hourly, add it to the gap.

What contractors get in return

The comparison is not one-sided, and the advantages are genuine:

• Business expenses are deductible. Equipment, software, a home office, mileage, training — all reduce profit before tax. An employee deducts none of these.
• The QBI deduction — up to 20% of business income, unavailable on a salary. This is significant and is included in the calculation above.
• Far larger retirement limits. A solo 401(k) can shelter several times what a typical employee plan allows.
• Multiple clients, which is a genuinely different risk profile from one employer.
• Control over when, where and how you work.

The rule of thumb, and why it is roughly right

The common advice is that a contract rate should be 25–35% above the equivalent salary. The arithmetic supports it: roughly 7–8% for the employer payroll tax, 15–25% for benefits, plus a margin for unpaid time and the risk of gaps between contracts.

Use the break-even figure above rather than the rule of thumb — it is computed from your actual numbers, including your benefits valuation and expected expenses.

It is not always your choice

Worth knowing: classification is not something you and an employer can simply agree on. It is determined by how the work actually happens — who controls the schedule, who provides equipment, whether the work is central to the business.

An employer offering 1099 terms for what is functionally a job is taking a risk that falls mainly on them, but it can affect you too. Our guide on contractor versus employee covers the tests.

What this does not include

• State income tax — federal only, and it applies to both sides
• Unemployment insurance, which contractors generally cannot claim
• Gaps between contracts — real, and the main risk of contracting
• An S-corp election, which can improve the 1099 side above roughly $80,000 of profit

The first three favour the W-2 side; the last favours the 1099 side. If you are close to the line, model the S-corp option with our S-corp calculator before deciding.