How it's calculated
The calculator puts a W-2 job and a 1099 contract side by side, from both points of view.
For the business, a W-2 employee costs their salary plus the employer's Social Security and Medicare, federal and state unemployment tax, health insurance and 401(k) contributions (the same method as the employee cost calculator). A contractor costs their hourly rate times the hours billed, and nothing else: no payroll taxes, no benefits.
For the worker, an employee has Social Security and Medicare withheld from pay and receives the benefits. A contractor pays self-employment tax, which covers both the employee and employer halves of Social Security and Medicare, on their profit after business expenses.IRS
The calculator also finds two break-even rates: the 1099 rate at which a contractor costs the business the same as the W-2 role, and the rate a contractor would need to keep as much as the employee does after payroll taxes, counting the employee's benefits as part of their pay.
The formula
Self-employment tax, following Schedule SE Part I:
- Net profit = hourly rate × hours billed − business expenses.
- Net earnings from self-employment = net profit × 92.35%. Under $400, no self-employment tax is due.
- Social Security part = 12.4% × the smaller of net earnings or the Social Security wage base ($184,500 for 2026), less any W-2 Social Security wages.
- Medicare part = 2.9% × net earnings.
- Self-employment tax = line 3 + line 4. Half of it is deductible when figuring income tax.
- Additional Medicare Tax of 0.9% applies to net earnings over $200,000 for a single filer (Form 8959), and is included for both workers.
Then:
- Business saves = W-2 total cost − contractor rate × hours.
- Employee keeps = salary − employee Social Security and Medicare + employer health and 401(k) contributions.
- Contractor keeps = net profit − self-employment tax − Additional Medicare Tax.
Worked example
A $75,000 salary in Texas with a $500 monthly health share and a 3% 401(k) match costs the business $89,273. A contractor billing $50 an hour for 40 hours a week, 48 weeks a year costs $96,000.
| Line | W-2 employee | 1099 contractor |
|---|---|---|
| Pay | $75,000 | $96,000 |
| Employer Social Security & Medicare | $5,738 | $0 |
| Federal and state unemployment tax | $285 | $0 |
| Health insurance and 401(k) | $8,250 | $0 |
| Cost to the business | $89,273 | $96,000 |
| Worker's Social Security & Medicare / self-employment tax | $5,738 | $13,564 |
| Contractor's business expenses | $0 | $0 |
| Benefits received | $8,250 | $0 |
| Worker keeps before income tax | $77,513 | $82,436 |
The contractor pays $13,564 in self-employment tax. Any rate under $46.50 an hour costs the business less than the W-2 role; the contractor needs $47.01 an hour to come out even with the employee before income tax.
Assumptions and limitations
- Before income tax. Both workers owe federal and state income tax, which depends on their whole return. A contractor deducts half of self-employment tax and may qualify for the qualified business income deduction, so the same profit is often taxed a little less.
- Benefits are valued at what they cost the employer. A contractor buying their own health insurance and retirement savings may pay more or less than that.
- Classification is not a choice. Whether a worker is an employee or a contractor depends on how much control the business has over the work, the financial relationship and how the parties behave, not on the contract's label. Misclassifying an employee can leave the business owing the employment taxes.IRS
- Contractor hours. Contractors are not paid for holidays or vacation, so compare the hours they will actually bill in a year, not every working day of the year, unless the contract really covers that many.
- Not included: state disability or paid-leave taxes, workers' compensation, recruiting and administration costs on either side.