Compare take-home pay as a W-2 employee versus a 1099 independent contractor. See how FICA, self-employment tax, benefits, paid time off, and business expenses change the picture — and find the hourly rate you would need to charge to break even.
Enter your W-2 salary and a proposed 1099 contract rate to see which arrangement leaves more money in your pocket at the end of the year.
W-2 employees pay 7.65% of their wages in payroll taxes (Social Security + Medicare) and their employer pays the matching 7.65%. A 1099 contractor pays both halves — 15.3% of 92.35% of net earnings — through self-employment tax, on top of regular income tax. Contractors also pay the full cost of benefits (health insurance, retirement, PTO) that employers often subsidize for W-2 staff. That is why a contractor's gross rate needs to be meaningfully higher than an employee's hourly equivalent just to break even.
Take your net earnings (gross contract income minus business expenses), multiply by 92.35% (the portion of net earnings subject to SE tax), then multiply by 15.3%. Example: $60,000 net → $60,000 × 0.9235 × 0.153 = $8,477.73 in self-employment tax. Half of that ($4,238.86) is deductible above the line when computing your income tax. Note that the Social Security portion (12.4%) applies only up to the annual wage base — earnings above that are still subject to the 2.9% Medicare portion.
Yes, in most cases. The Qualified Business Income (QBI) deduction lets eligible sole proprietors and single-member LLCs deduct up to 20% of their qualified business income. For 2025, the deduction begins to phase out above roughly $197,300 of taxable income for single filers and $394,600 for married filing jointly, and certain specified service trades and businesses (law, accounting, consulting, health) face additional phase-out rules. This calculator deliberately leaves QBI out, so its estimates are conservative.
A common rule of thumb: divide your annual salary by 2,080 (40 hours × 52 weeks) to get the hourly equivalent, then multiply by 1.3-1.5 to cover self-employment tax, benefits, PTO, and unpaid downtime. Example: $80,000 ÷ 2,080 = $38.46/hr, so a fair contract rate would be roughly $50-58/hr. Use this calculator's break-even rate for a number tailored to your exact expenses, benefits, and tax situation.
Only if the working relationship genuinely meets the legal test. The IRS and courts look at behavioral control (who decides how and when the work is done), financial control (who pays for tools, who bears the profit/loss risk), and the type of relationship (written contracts, benefits, permanence). You cannot waive employee status by agreeing to a 1099 form — misclassification can trigger back taxes, penalties, and interest for the employer. If you believe you have been misclassified, you can file Form SS-8 with the IRS to request a determination.
Contractors have several powerful options: a solo 401(k) allows both employee contributions (up to $23,500 for 2025, plus $7,500 catch-up if 50 or older) and employer profit-sharing contributions, for a combined maximum around $70,000; a SEP IRA allows contributions up to 25% of net earnings (capped around $70,000); and a SIMPLE IRA offers a simpler middle ground. Because there is no employer match, the onus is on you to save — but the contribution limits can beat many employer plans.
⚠️ Important: Tax estimates are simplified (flat marginal rates, no deductions/credits beyond the SE tax deduction). Actual results vary by filing status, deductions, and state rules. This is not tax or employment-law advice. Worker classification is determined by law, not preference.