Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A W-2 salary and a 1099 revenue figure that look identical on paper fund very different real situations, because the 1099 number still has to cover self-employment tax, benefits, unpaid non-billable time and business risk that a W-2 paycheck has already absorbed before the number ever gets quoted.
Before you rely on it
What to check
Subtract self-employment tax, benefits cost and realistic unbilled time from the 1099 figure before comparing it directly against a W-2 salary offer.
The common error
Where people go wrong with w-2 vs. 1099 calculator
Comparing a 1099 rate and a W-2 salary as if the higher headline number automatically wins. The 1099 figure has real obligations still to come out of it that the W-2 number already accounts for.
Sensitivity evidence
How w-2 salary changes the contractor advantage
| W-2 salary | Contractor advantage | W-2 total compensation |
|---|---|---|
| $72,000 | $13,055 | $92,000 |
| $81,000 | $4,055 | $101,000 |
| $90,000worked example | -$4,945 | $110,000 |
| $99,000 | -$13,945 | $119,000 |
| $108,000 | -$22,945 | $128,000 |
Every input, tested
Which input moves the contractor advantage most
| Input | Tested from | To | Contractor advantage at each end | Swing |
|---|---|---|---|---|
| 1099 gross revenue | $117,000 | $143,000 | -$16,951 to $7,061 | $24,011 (486%) |
| W-2 salary | $81,000 | $99,000 | $4,055 to -$13,945 | $18,000 (364%) |
| Employer-paid benefits | $18,000 | $22,000 | -$2,945 to -$6,945 | $4,000 (81%) |
| Contractor expenses | $13,500 | $16,500 | -$3,445 to -$6,445 | $3,000 (61%) |
| Additional contractor tax rate | 6.7% | 8.7% | -$3,645 to -$6,245 | $2,600 (53%) |
Two variables at once
Contractor advantage by w-2 salary and employer-paid benefits
| W-2 salary \ Employer-paid benefits | $16,000 | $20,000 | $24,000 |
|---|---|---|---|
| $72,000 | $17,055 | $13,055 | $9,055 |
| $81,000 | $8,055 | $4,055 | $55 |
| $90,000 | -$945 | -$4,945 | -$8,945 |
| $99,000 | -$9,945 | -$13,945 | -$17,945 |
| $108,000 | -$18,945 | -$22,945 | -$26,945 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| W-2 salary | $90,000 |
| Employer-paid benefits | $20,000 |
| 1099 gross revenue | $130,000 |
| Contractor expenses | $15,000 |
| Additional contractor tax rate | 7.7% |
| Contractor advantage | -$4,945 |
| W-2 total compensation | $110,000 |
Where the inputs come from
For the W-2 side, enter the salary and the value of employer-paid benefits such as health insurance, retirement match and paid time off, from the offer letter and benefits summary. For the 1099 side, enter the gross revenue you would bill, your business expenses, and the extra tax burden a contractor pays, since the employer's half of Social Security and Medicare, 7.65% of income, falls on you. Include unpaid time between projects if the work is not steady.
Using the contractor advantage in a real decision
Do the comparison with realistic billing hours.
When the result stops applying
The calculation leaves out income tax differences, the QBI deduction, retirement plan options and unpaid gaps between contracts. Worker classification is decided by law, not by preference: a person who works under the company's control may be an employee regardless of the contract. Contractors have no unemployment insurance or workers' compensation coverage unless they buy it.
What to compare it with
Set a contractor rate with the freelance hourly rate calculator, and see the tax with the self-employment tax and QBI deduction pages. The contractor versus employee calculator gives the employer's viewpoint. Quarterly estimated payments and the benefits gap page cover the practical costs of leaving employment.
People also ask
Frequently asked questions
Why do 1099 workers need to earn more than employees?
They pay both halves of payroll tax, buy their own benefits, have unpaid time off and carry business costs, which together are often 25% to 40% of income.
Can my employer classify me as a contractor?
Only if the relationship meets the tests for independent contractors. Control over how, when and where you work usually points to employee status.
Do contractors get any tax advantages?
Yes. They can deduct business expenses, may qualify for the QBI deduction and can use retirement plans such as a solo 401(k) or SEP-IRA.