| W-2 salary | $100,000 |
|---|---|
| Employer payroll taxes (FICA, FUTA, SUI) | $7,930 |
| Workers' comp | $1,000 |
| Benefits | $12,000 |
| W-2 employee, all-in cost | $120,930 |
| 1099 contractor fee | $110,000 |
| Break-even contractor fee | $120,930 |
Classification is decided by the facts of the working relationship, not by the cheaper option. The IRS and your state look at behavioral and financial control and the relationship.
This is an estimate for planning, not tax, legal or accounting advice. Check figures with a qualified professional before you rely on them.
How it works
An employee costs more than their salary: you pay the employer share of Social Security and Medicare, unemployment taxes, and usually benefits and workers' compensation. A contractor invoices you a fee and handles their own taxes, so you pay no payroll taxes on it.
The contractor pays both halves of Social Security and Medicare as self-employment tax and has no employer benefits, so a break-even fee is rarely a good deal for them. Treat the break-even figure as the fee at which your all-in cost is the same.
Formula notes
- W-2 all-in cost = salary + Social Security 6.2% (to $184,500) + Medicare 1.45% + FUTA 0.6% on $7,000 + SUI + workers' comp + benefits.
- 1099 cost = the fee you pay. No employer payroll taxes are due on it.
- Break-even fee = the W-2 all-in cost.
- Not included: paid time off, equipment, recruiting, unemployment claims or penalties for misclassifying a worker.
Sources
- IRS: independent contractor or employee?
- IRS Publication 15 (Circular E)
- IRS Form 940 instructions (FUTA)
- SSA: 2026 Social Security changes (wage base)
Estimate, not tax advice. Check figures with a qualified professional before you rely on them.
Common questions
Can I treat a worker as a contractor to save money?
Only if they really are one. The IRS and states apply tests about behavioral control, financial control and the type of relationship. Misclassifying a worker can lead to back taxes and penalties.
Why does a contractor need a higher rate than an equivalent salary?
A contractor pays both halves of Social Security and Medicare as self-employment tax and buys their own benefits and insurance, so they usually need a higher gross rate.
Do I file a form for contractors?
Businesses generally report payments to contractors on Form 1099-NEC by January 31 when they meet the IRS threshold. See the payroll tax calendar.
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