1099 vs W-2 Calculator

How a 1099 and a W-2 compare

The headline number on a contract and the headline number on a salary are not the same kind of number, and comparing them directly is the mistake that costs people money. A salary is paid to you after the employer has already covered half of your payroll tax and usually part of your health insurance. A contract pays you the whole amount and leaves you to cover both.

Three differences drive the gap. The first is payroll tax. An employee pays 7.65% of wages for Social Security and Medicare and the employer pays a matching 7.65%. A self-employed person pays both halves, a combined 15.3%, on 92.35% of net profit. The IRS self-employment tax page sets out the rule, and the Social Security wage base caps the Social Security part at $184,500 for 2026.

The second difference is benefits. Employer health insurance, a 401k match, paid holidays and paid sick time all have a cash value, and a contractor funds every one of them out of their own income. The third is expenses. A contractor can deduct the cost of doing business, which an employee cannot, and that deduction avoids both income tax and self-employment tax.

This calculator puts all three on the same page. Enter the salary, the value of the benefits, the contract gross and the business expenses, and it shows the cash and the total value of each offer.

Worked example: $75,000 salary against a $95,000 contract

Take a W-2 job paying $75,000 with a benefits package worth $6,000, against a 1099 contract paying $95,000 gross with $9,000 of business expenses. Single filer, standard deduction, no state income tax.

The contract wins on cash by $6,763 and on total value by $763. Two forces are at work. The contract pays more gross and can deduct $9,000 of expenses, which lowers taxable income. Against that, the self-employment tax of $12,151 is $6,413 more than the $5,738 of FICA on the salary, and the contract gets no benefits.

Now change the contract. Hold the gross at $95,000 but cut the expenses to zero, and profit rises to $95,000. Self-employment tax climbs to $13,423 and federal income tax to $6,709, so cash lands at $74,868. The contract now wins by a wide margin, because the $9,000 of expenses were never money in your pocket anyway. That is why the clean way to read the result is the last line: total value, with the benefits counted.

The self-employment tax gap

Self-employment tax is the difference most people underestimate. The rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, and it is charged on 92.35% of your net profit rather than the full amount. That 92.35% figure is there so the self-employed get the same effective treatment as employees, since the employer half of FICA is not counted as employee income.

On $86,000 of profit the tax base is $79,421 and the tax is $12,151. The same $86,000 paid as wages would attract $6,580 of employee FICA. The gap of $5,571 is the price of being your own employer, and it is the number to keep in mind when you set a contract rate.

Two rules soften it. Half of the self-employment tax is deductible against income tax, which this calculator applies, and the Social Security portion stops at the wage base of $184,500. Above that figure only the 2.9% Medicare part keeps applying, so a high earner's self-employment tax grows more slowly. The IRS page on self-employment tax walks through the deduction.

Because no employer is withholding, a contractor also has to make quarterly estimated payments. The rule of thumb is that if you expect to owe $1,000 or more for the year, the IRS wants four payments across the year rather than one in April. Miss them and the penalty is interest, not a fine, but it adds up.

What employer benefits are worth

Benefits are the part of a W-2 offer that never appears on the salary line, and they are easy to undervalue. The table below puts rough annual numbers on the common ones for a mid-range salary.

Add the FICA half and a health plan and a modest match, and a $75,000 salary is worth about $86,000 to $88,000 before you count paid time off. That is the number a contract has to beat, and it is why a 1099 rate that looks generous next to an hourly wage often is not.

The flip side is that a contractor controls the money. A health plan bought on the individual market may cost less than the value of an employer plan, and a solo 401k lets a contractor put away far more than an employee can. For a healthy person with steady work, the gap narrows. For someone with a family and a chronic condition, employer insurance is worth a great deal.

When the 1099 offer wins

A contract beats a salary in three situations. The first is a large enough gap in gross pay. The break-even in the example is $94,008 of contract gross to match a $75,000 salary with $6,000 of benefits. Anything above that is a genuine raise, and anything below it is a pay cut wearing a higher number.

The second is a big pile of legitimate business expenses. A contractor who drives between job sites, buys tools, and runs a home office can deduct real costs that an employee pays out of already-taxed income. In the example, $9,000 of expenses saves roughly $2,500 in tax, which is a large slice of the gap by itself.

The third is retirement saving. A solo 401k allows contributions as both employer and employee, and a SEP IRA allows up to about 25% of net earnings. A contractor who can put $20,000 or more a year into a retirement plan is building something an employee on the same gross income usually cannot match.

Against those, weigh the risks. Contract work can end without notice, and there is no unemployment insurance to fall back on. There is no workers compensation if you are injured. There is no paid leave, so a two-week illness is two weeks of no income. If the contract pays only a little more than the salary, those risks usually outweigh the difference.

What this estimate leaves out

The calculator covers federal income tax and the payroll tax on both sides, and it treats the benefits you enter as a flat annual value. Four things can move the real answer.

State tax is applied at the flat rate you enter. States with progressive brackets take a different share from a salary than from contract profit, and a few states treat self-employment income differently from wages. Enter your own effective rate and confirm it with your state revenue department.

Credits and deductions are not modelled. The child tax credit, the earned income credit, student loan interest and itemised deductions all change the answer, and several of them phase out at different income levels. A married couple with children can land somewhere different from the single-filer result shown here.

Retirement contributions are not modelled either, and they matter for both sides. A traditional 401k or IRA contribution lowers taxable income, and a self-employed person has more room to contribute. If you plan to max out a retirement account, run the numbers again with a lower taxable income for the side that offers more room.

Finally, the calculator does not judge whether a role is correctly classified. Calling a worker a contractor when the employer controls the schedule, the tools and the work is misclassification, and it is not something a rate can fix. The IRS and the Department of Labor publish tests for this, and it is worth checking before you sign.

This is an estimate, not tax or legal advice. Tax rules change without notice. Confirm your own situation with a qualified tax professional before you decide.