Why a 1099 contract has to pay more
A contract that pays the same as a salary leaves you with less. Four things make the difference:
- You pay both halves of Social Security and Medicare. An employee pays 7.65% and the employer quietly pays another 7.65%. As a contractor you pay self-employment tax of 15.3% on 92.35% of your profit — about 14.1% — although half of it is deductible.
- No benefits. Health insurance, a 401(k) match and paid holidays and vacation are part of what a job pays you. As a contractor you buy or go without them.
- Your own expenses. A laptop, software, a phone, insurance, travel: the employer used to pay. You can deduct them, but you still spend the money.
- Unpaid time. Holidays, sick days, admin and the gaps between clients aren't billable. Most full-time contractors bill well under 2,080 hours a year.
On the other side, contractors can deduct business expenses, may get the 20% qualified business income deduction, and can save more for retirement in a SEP-IRA or solo 401(k). The calculator includes the QBI deduction and deductible health insurance automatically.
The rule of thumb
Many people use 1.25× to 1.5× the salary as the contract rate that breaks even. The calculator works out your own figure from the salary, the value of your benefits, and your expenses — for example, for an $80,000 job with $12,000 of benefits, against a contract with $3,000 of expenses and $6,000 of health insurance), it's about 1.37×.
Turning the yearly figure into an hourly rate
Divide the break-even amount by the hours you'll actually bill. The calculator shows the rate at 2,080 hours (40 hours × 52 weeks) as a starting point. If you take 10 holidays, two weeks off and a few days between clients, 1,800 hours is more realistic — and your hourly rate needs to be about 15% higher.
Taxes once you're on a 1099
No tax is taken out of a 1099 payment. Set aside part of every payment and pay the IRS in four quarterly instalments. See how much with our 1099 tax calculator and our quarterly tax calculator. Bill your client with our free invoice generator or the independent contractor invoice template.
Frequently asked questions
Is 1099 or W-2 better?
It depends on the pay. At the same yearly amount, a W-2 job almost always leaves you better off, because the employer pays half of your Social Security and Medicare and provides benefits. A contract is better when it pays enough more to cover that — the break-even figure above — or when the flexibility is worth it to you.
How much more should a 1099 contractor charge?
Enough to reach the break-even amount, plus a margin for risk: contracts end without notice and have no unemployment insurance. For many people that's 1.3× to 1.5× the equivalent salary.
Can my employer just switch me from W-2 to 1099?
Not if nothing else changes. Whether you're an employee or a contractor depends on how the work is controlled — who sets your hours, provides the tools and directs how the work is done — not on the label. If you think you've been misclassified, the IRS explains the rules and Form SS-8 lets you ask for a ruling.
Does this include state tax?
No. It compares federal tax only. In most states, state income tax is similar either way, so it doesn't change the comparison much.
Can I be W-2 and 1099 at the same time?
Yes — a day job plus freelance work on the side is common. Use the 1099 tax calculator and enter both: your W-2 wages use up part of the Social Security wage base first.