1. Scope
Compares the fully-loaded annual cost of filling a role as a W-2 employee versus a 1099 contractor at a given hourly rate. US-only defaults. Not legal advice — classification is governed by IRS and state tests the tool does not evaluate.
2. Inputs and outputs
Inputs
- employeeSalary number (currency/year)
- employerTaxRate percent default: 7.65
- benefitsPercent percent default: 25
- contractorHourlyRate number (currency)
- contractorHoursPerYear number default: 2000
Outputs
- employeeTotal
Fully-loaded W-2 annual cost.
- contractorTotal
Hourly rate × hours.
- breakevenHourlyRate
Hourly rate at which contractor cost equals employee total.
- savings
employeeTotal − contractorTotal.
Engine source: src/lib/contractor-vs-employee-calculator/engine.ts
3. Formula / scoring logic
employee_total = salary * (1 + employer_tax + benefits)
contractor_total = hourly_rate * hours
breakeven_rate = employee_total / hours4. Assumptions
- Assumes correct classification under IRS common-law test. Mis-classification exposes the payer to back-taxes and penalties — consult a qualified professional.
- Contractor rate is the gross billable rate; the tool does not model contractor-side self-employment tax or benefits.
- Does not include equipment, training, or onboarding differences between W-2 and 1099 engagements.
5. Data sources
6. Known limitations
- The ABC test (California AB5, and similar state statutes) imposes stricter classification than federal common-law. The tool does not evaluate jurisdictional tests.
- Contractors typically charge a premium to cover their own taxes and benefits; hour-for-hour comparisons understate that premium.
7. Reproducibility
Input
salary = $100,000, employerTax = 7.65%, benefits = 25%, contractorRate = $75/hr, hours = 2000.
Expected output
employee_total ≈ $132,650, contractor_total = $150,000, breakeven ≈ $66.33/hr.
8. Change log
- 2026-04-24 methodology page first published.
Worked example
Run live against the same engine this site ships
(/engines/contractor-vs-employee-calculator.js).
The inputs and outputs below are recomputed on every build and
independently re-verified in CI — they are never hand-authored.
Input
- tool
- contractor_vs_employee
- annual_salary
- 85000
- contractor_hourly_rate
- 70
- annual_hours
- 2080
- employer_fica_rate_percent
- 7.65
- futa_annual
- 42
- state_unemployment_annual
- 420
- health_insurance_annual
- 7000
- retirement_match_rate_percent
- 3
- workers_comp_rate_percent
- 1
- training_equipment_annual
- 2000
Output
- annualSalary
- 85000
- contractorHourlyRate
- 70
- annualHours
- 2080
- w2TotalAnnualCost
- 104364.5
- contractorAnnualCost
- 145600
- w2HiddenCosts
- 19364.5
- breakEvenContractorHourlyRate
- 50.18
- annualCostDelta
- 41235.5
- monthlyCostDelta
- 3436.29
- cheaperOption
- w2_employee
- breakdown[0].label
- Base salary
- breakdown[0].amount
- 85000
- breakdown[0].category
- Salary
- breakdown[1].label
- Employer FICA
- breakdown[1].amount
- 6502.5
- breakdown[1].category
- Taxes
- breakdown[2].label
- FUTA
- breakdown[2].amount
- 42
- breakdown[2].category
- Taxes
- breakdown[3].label
- State unemployment
- breakdown[3].amount
- 420
- breakdown[3].category
- Taxes
- breakdown[4].label
- Workers comp
- breakdown[4].amount
- 850
- breakdown[4].category
- Taxes
- breakdown[5].label
- Health insurance
- breakdown[5].amount
- 7000
- breakdown[5].category
- Benefits
- breakdown[6].label
- 401(k) match
- breakdown[6].amount
- 2550
- breakdown[6].category
- Benefits
- breakdown[7].label
- Training & equipment
- breakdown[7].amount
- 2000
- breakdown[7].category
- Overhead
Frequently asked questions
- What does the Contractor vs Employee Calculator calculate?
- Compares the fully-loaded annual cost of filling a role as a W-2 employee versus a 1099 contractor at a given hourly rate. US-only defaults. Not legal advice — classification is governed by IRS and state tests the tool does not evaluate.
- What inputs does the Contractor vs Employee Calculator need?
- It takes 5 inputs: employeeSalary, employerTaxRate (default 7.65), benefitsPercent (default 25), contractorHourlyRate, contractorHoursPerYear (default 2000). Outputs returned: employeeTotal, contractorTotal, breakevenHourlyRate, savings.
- What formula does the Contractor vs Employee Calculator use?
- The exact computation is: employee_total = salary * (1 + employer_tax + benefits); contractor_total = hourly_rate * hours; breakeven_rate = employee_total / hours
- Can I verify the Contractor vs Employee Calculator with a worked example?
- Yes. With salary = $100,000, employerTax = 7.65%, benefits = 25%, contractorRate = $75/hr, hours = 2000. the tool returns employee_total ≈ $132,650, contractor_total = $150,000, breakeven ≈ $66.33/hr.
- Where does the Contractor vs Employee Calculator get its benchmark data?
- Reference data is sourced from: US IRS — Independent Contractor (Self-Employed) or Employee? (as of 2024); US BLS Employer Costs for Employee Compensation (ECEC) (as of 2024).
- What can the Contractor vs Employee Calculator not tell me?
- Known limitations: The ABC test (California AB5, and similar state statutes) imposes stricter classification than federal common-law. The tool does not evaluate jurisdictional tests. Contractors typically charge a premium to cover their own taxes and benefits; hour-for-hour comparisons understate that premium.