1099 vs W-2 Calculator (2026)

How to use this 1099 vs w2 calculator

1. Enter the W-2 salary, then the part of the health premium that comes out of your own paycheck. That share is deducted before payroll tax, which is worth more than it looks.
2. Add the 401(k) match and your paid days off. The match is real money into your account; the paid days are weeks you are paid for without working, and a contractor is paid for neither.
3. On the contract side, enter the rate on the table and — more importantly — the hours you will actually bill. Not 2,080. Nobody bills 2,080.
4. Enter the full health premium you would buy on your own, with no employer share, plus your deductible business expenses.
5. Read the number at the top. That is the contract rate at which both options leave you in the same position. Anything below it is a pay cut wearing a bigger number.

Why the contract rate has to be so much higher

The part everyone knows is the payroll tax. An employee pays 7.65% in FICA and the employer quietly pays a matching 7.65%. A contractor pays both halves as 15.3% self-employment tax. But that gap is smaller than it first appears: only 92.35% of net earnings is subject to it, half of what you pay is deductible against income tax, and contractors — unlike employees — can take the 20% qualified business income deduction. Netted out, the tax difference is real but it is rarely the biggest line.

The bigger lines are the ones that never appear on a payslip. Employer-sponsored health coverage is the largest: a plan an employee sees as $300 a month out of their cheque often costs two or three times that on the open market, and the employer share simply vanishes when you go contract. Then the 401(k) match — 4% of salary is money that arrives in your account whether or not you notice it, and no client will match anything.

Then there is time. A salaried employee with twenty paid days off and public holidays is paid for roughly 2,080 hours while working closer to 1,900. A contractor is paid only for hours billed, and hours billed are always fewer than hours worked: proposals, invoicing, chasing payment, the gap between one contract ending and the next starting. Someone who bills 1,800 hours has had a good year. Comparing a salary to a contract rate without adjusting for this is the single most common error, and it flatters the contract every time.

Set against all that, the contract side has genuine advantages the calculator does count. Business expenses come off before tax rather than out of after-tax income. The QBI deduction can be worth several thousand dollars. A solo 401(k) allows far larger contributions than an employee plan. And rates are negotiable in a way salary bands usually are not. The point of running the numbers is not to talk yourself out of contracting — it is to know the floor before you name a figure.

Example

A developer is offered $120,000 as a salaried employee: $3,600 a year of the health premium comes out of her paycheck, the employer matches 4% into a 401(k), and she gets twenty days off plus holidays. The alternative is a 1099 contract at $85 an hour. She expects to bill 1,800 hours, buy her own coverage at $9,600 a year, and spend $6,000 on equipment, software and accounting. She files as single and qualifies for the QBI deduction.

Break-even contract rate: $79.51 an hour — 38% above the $57.69 the salary works out to.

The salary divided by a 2,080-hour year is $57.69 an hour, and that is the number people quote to themselves when a client offers $85. It looks like a 47% raise. After the calculation it is a 7% improvement in what actually reaches her — $102,396.56 against $95,517.40, a difference of $6,879.16 over a full year.

The three quiet lines explain almost all of the compression. She loses the $4,800 match. She pays $9,600 for coverage instead of $3,600, so $6,000 more. And she bills 1,800 hours instead of being paid for 2,080, which at $85 is $23,800 of revenue that never happens. Those three come to $34,600 before a single dollar of tax difference.

Tax pushes back harder than expected. Self-employment tax is $20,770.44 against $8,904.60 of FICA — $11,865 worse. But her income tax is $2,545 lower than the employee's, because the QBI deduction takes $22,182.96 off taxable income and half the self-employment tax comes off as well. The net tax penalty is around $9,300, not the $11,865 the headline rates suggest.

The break-even rate of $79.51 is the number worth carrying into the conversation. Below it the contract pays less than the salary while carrying more risk. At $85 she is ahead, but by about $573 a month — which is a reasonable premium for the freedom and a thin one for the absence of unemployment insurance, sick pay and notice.

Change one input and the answer moves a long way. Billing 1,600 hours instead of 1,800 pushes the break-even rate close to $89. That sensitivity is the real lesson: for a contractor the utilisation rate matters more than the rate itself, and it is the one both sides forget to negotiate.

Limits and things to watch for

• Federal only. State income tax applies to both sides and usually narrows the gap slightly, but a handful of states and cities levy additional taxes on business income that a salaried employee never sees.
• It assumes the contract is a sole proprietorship or single-member LLC filing a Schedule C. An S-corporation election changes the arithmetic materially at higher incomes by splitting income into salary and distribution — worth modelling separately once profit is well above $80,000.
• It does not price unemployment insurance, workers' compensation, paid sick leave, disability cover, notice periods or severance. All of those come with the W-2 and none with the contract, and none of them are free to replace.
• The QBI treatment is the simple under-threshold case. Specified service businesses — consulting, law, health, financial services — lose the deduction as income rises past the threshold, which shifts the break-even rate upward for exactly the people most likely to be reading this.
• Worker classification is a legal test, not a choice. If the working arrangement looks like employment, calling it a 1099 does not make it one. Misclassification liability falls on the business, but the disruption falls on you.

Disclaimer. This calculator is general information, not tax or legal advice. It uses published IRS and SSA figures for tax year 2026 and models the ordinary Schedule C case. Worker classification, state obligations and entity choice depend on your circumstances. Confirm with a qualified accountant before making a decision, and check the sources below if the last-updated date is old.

Frequently asked questions

What multiplier should I apply to a salary to get a contract rate?

The rules of thumb you will hear are 1.3x to 1.5x the hourly equivalent of the salary. This calculator returned 1.38x for a fairly typical set of inputs, so the rule of thumb is not bad — but it hides the fact that the answer swings on billable hours more than anything else. Run your own numbers before you quote.

How many hours can I realistically bill in a year?

Full-time employment is 2,080 hours. Established contractors with steady work typically bill 1,600 to 1,900. Anyone in their first year, or working through a gap between clients, should plan on considerably less. Every hour spent on proposals, invoicing, chasing late payment and admin is unpaid, and it adds up to a working day a week for most people.

Does the QBI deduction really apply to contract work?

For most sole proprietors under the income threshold, yes — it takes 20% off qualified business income. It is the one part of the tax code that favours the contractor over the employee. The complication is that consulting, legal, health and financial services are specified service businesses, and the deduction phases out for them above the threshold.

Should I set up an S-corporation?

It can save real money on self-employment tax once profit is comfortably into six figures, by splitting income into a reasonable salary and a distribution that is not subject to it. It also brings payroll filings, a separate return, state fees and a "reasonable compensation" judgement the IRS can dispute. Below roughly $80,000 of profit the costs usually eat the saving. This is a conversation to have with an accountant, not a calculator.

What about health insurance if I have a spouse with coverage?

It changes the answer more than any other single input. If you can join a spouse's employer plan, the largest line in the contractor column mostly disappears and the break-even rate drops sharply. Enter your actual marginal cost of joining that plan rather than zero — it is rarely free to add a dependant.

Is the employer really paying 7.65% on top of my salary?

Yes, plus federal and state unemployment tax, and usually workers' compensation insurance. Economists will tell you the cost is ultimately borne by the employee in the form of a lower wage, which is true in aggregate and no comfort at all when you are the one being asked to absorb it directly.

Related tools

• Freelance hourly rate calculator
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Guides

• 1099 vs W-2: the real cost comparison
• How to set your freelance hourly rate
• Self-employment tax explained (2026 rates)