How to read a 1099 vs W-2 comparison
A contract rate and a salary aren't the same dollar. Two things make a 1099 number worth less than it looks, and one thing makes it worth more:
1. You pay both halves of payroll tax
A W-2 employee pays 7.65% in Social Security and Medicare; the employer quietly pays the matching 7.65%. A 1099 contractor pays both halves — 15.3% — as self-employment tax. Half of it is deductible against income tax, which helps, but it's still the single biggest reason a contract rate has to be higher.
2. You replace the benefits yourself
No employer health contribution, no 401(k) match, no paid vacation or holidays. Each of those has a real dollar value, and as a contractor it comes out of your rate.
3. But you get the QBI deduction and bigger write-offs
Self-employment unlocks the 20% Qualified Business Income deduction, the ability to deduct real business expenses, the self-employed health insurance deduction, and far larger retirement contributions (a SEP-IRA or Solo 401(k) can shelter tens of thousands). These tilt the math back toward 1099 — which is why you need a calculator, not a rule of thumb.
The "make you whole" rate
The headline number is the contract rate at which your net value is identical either way — same take-home, same benefits funded, same hours. Below it, the salary wins; above it, the contract does. Most people find the break-even rate lands 25–40% above the salary, but yours depends on your state, your benefits, and whether you qualify for QBI. Earn above the rate and the contract genuinely pays more; quoting below it means you're effectively taking a pay cut to go independent.
New to this? What every term means
Plain-English definitions for the jargon on this page. None of these is the whole story on its own — read them together.
Self-employment tax 15.3%
Social Security (12.4%) + Medicare (2.9%) on 92.35% of your net profit. It replaces the FICA an employer would split with you — as a contractor you pay all of it. Half is deductible against income tax.
FICA (employee) 7.65%
The payroll tax withheld from a W-2 paycheck — 6.2% Social Security (up to the wage base) + 1.45% Medicare. Your employer pays a matching 7.65% you never see.
QBI deduction up to 20%
The Qualified Business Income deduction — up to 20% of your business profit, deducted from federal income tax. A genuine perk of 1099 work. Phases out for high-earning service businesses.
SSTB phase-out applies
A "specified service trade or business" — consulting, law, medicine, accounting, finance, performing arts, athletics. Above an income threshold these lose the QBI deduction; other businesses keep it.
401(k) match free money
Retirement dollars an employer adds on top of your salary, commonly ~4%. It vanishes when you go 1099 — to break even you'd contribute that amount yourself.
Net value / year the yardstick
Each side reduced to one number: take-home pay after taxes, plus employer benefits on the W-2 side, minus the benefits you self-fund on the 1099 side. What lets the two be compared directly.
Billable vs paid hours why rate > salary/2080
A salary pays ~2,080 hours including vacation. A contractor only bills the hours actually worked, so the same yearly income requires a higher hourly rate.
Effective tax rate lower is better
Total tax ÷ gross income. Handy for comparing the two paths — the 1099 side often shows a higher rate before its deductions, then narrows the gap.
Frequently asked questions
- How much higher should a 1099 rate be than a salary?
- Usually 25–40% higher. The gap covers the extra 7.65% employer payroll tax you now pay yourself, the health and retirement benefits your employer used to provide, and unpaid time off. This tool computes the exact figure for your state and numbers.
- Does this include state taxes?
- Yes — all 50 states and DC, plus local income tax for the cities and counties that levy it (NYC, Philadelphia, and others), via the locality picker that appears for those states.
- Is the QBI deduction really that valuable?
- For many contractors it's worth thousands a year. It deducts up to 20% of business profit from federal income tax. The catch is the phase-out for high-earning service businesses (consultants, lawyers, doctors) — toggle "specified service business" to model it.
- Is my data sent anywhere?
- No. Every calculation happens in your browser. We don't store your inputs or require an account.