A contract rate that matches your salary on paper leaves you worse off. This works out the rate you actually need once you carry both halves of FICA and fund your own benefits.
| W-2 salary | — |
| Take-home as an employeeafter federal, FICA and state | — |
| Benefits you would replace | — |
| Total you must match | — |
Moving from a salary to a contract rate at the same number is a pay cut, and usually a substantial one. Three things change at once.
First, you pick up the employer's half of Social Security and Medicare — 7.65% of earnings that somebody else was paying. Second, benefits that arrived invisibly now come out of your own revenue: health premiums, the 401(k) match you were receiving, and paid leave, which is simply unpaid time when you are a contractor. Third, your income becomes irregular, which has a cost that no calculator can price.
For a typical package the honest premium sits somewhere between 25% and 45% depending on how generous the benefits were. The figure this page produces is derived from your specific numbers rather than a rule of thumb.
Twenty days of paid leave plus holidays is roughly a month of the year during which a salaried employee is paid and a contractor is not. On a $100,000 salary that is close to $8,000 of income that simply does not exist on the contract side.
Contractors also absorb sick days, slow periods between engagements, and the unpaid hours spent finding the next client. None of that appears in an hourly rate negotiation, and all of it reduces what you actually earn across a year.
The calculator counts paid leave days at your daily salary equivalent. It does not attempt to price the gaps between contracts, which means the real premium you need is higher than the figure shown.
Not everything is one-directional. Half of your self-employment tax is deductible against income tax. Business expenses — equipment, software, a home office, professional development, travel — reduce your taxable profit in a way they never did as an employee.
Retirement capacity is considerably larger. A solo 401(k) or SEP-IRA allows contributions well above the standard employee deferral limit, because you contribute as both employer and employee.
The qualified business income deduction may let you deduct up to 20% of qualified business income, subject to thresholds and service-business limitations. It is not modelled here, and if you qualify it narrows the gap meaningfully.
Enter your expected deductible expenses and the equivalent rate falls accordingly. What it cannot price is the trade of security for autonomy, which is usually the actual decision.
Whether you are a contractor or an employee is determined by the working relationship, not by what the contract says or which form gets issued. If a company controls how, when and where you work, supplies your equipment and directs your methods, you are likely an employee regardless of paperwork.
Misclassification is enforced by both the IRS and state labour agencies, and several states apply a stricter test than the federal one. If you are being offered 1099 status for work that looks like a job, that is worth understanding before signing rather than after.
Typically 25% to 45% higher, depending on the benefits you are giving up. The calculator works it out from your specific package rather than a rule of thumb.
They pay both halves of Social Security and Medicare — 15.3% rather than the 7.65% an employee pays — because there is no employer covering the other half.
No. The qualified business income deduction can allow up to 20% of qualified business income to be deducted, subject to thresholds and service-business limits that depend on facts not collected here. If you qualify, the gap narrows.
Not simply by choosing to. Classification depends on the actual working relationship — who controls how, when and where the work happens. Misclassification is enforced by the IRS and by state agencies, several of which apply stricter tests.