1099 vs W-2: What Contract Rate Matches a Salary?
The usual advice is to add 30% to a salary before accepting the same work as a contractor. On federal tax alone that is far too high: at $100,000, a contractor needs about $102,222 of revenue to match an employee's take-home — a premium of roughly 2%.
The reason is that the 20% qualified business income deduction almost exactly offsets the extra self-employment tax. The premium a contractor genuinely needs is for benefits, not for tax.
How it's calculated
Compare the two positions honestly and the tax difference is much smaller than folklore suggests.
An employee on a $100,000 salary pays 7.65% in Social Security and Medicare — $7,650 — and $13,170 of federal income tax, taking home $79,180. Their employer pays the matching $7,650 the employee never sees.
A contractor billing $102,222 for the same work pays the full 15.3% self-employment tax on 92.35% of profit, which is $14,443.50 — nearly double the employee's FICA. But the contractor's income tax is far lower: after the deduction for half of self-employment tax and the 20% QBI deduction, taxable income falls to $63,120 and the income tax is $8,598.43. Total federal tax is $23,041.93, and the take-home is $79,180 — identical.
So the extra self-employment tax is real, and the QBI deduction very nearly cancels it. That is the finding, and it is why "add 30% for taxes" misprices contract work at this income level.
What that comparison leaves out is everything that is not tax, and this is where the actual premium lives. An employer typically provides health insurance at a heavily subsidised premium, a retirement plan with a matching contribution, paid holiday and sick leave, unemployment insurance, workers' compensation, and often equipment and training. A contractor buys all of it, or does without.
Quantify those rather than guessing at a percentage. Health insurance for a family bought individually can exceed $20,000 a year where an employer plan cost the employee a fraction of that. A 4% retirement match on $100,000 is $4,000. Four weeks of paid leave plus holidays is roughly 10% of the year. Add them up and the premium a contractor needs is frequently 25% to 40% — but it is a benefits premium, and it varies enormously by person. Someone covered by a spouse's health plan needs far less than someone insuring a family alone.
Three caveats on the tax side. The QBI deduction is what makes the comparison so close, and it phases out above the §199A threshold — $201,775 single for 2026 — so the picture changes for high earners and for some service businesses. State tax is not modelled here and can move the comparison either way. And a contractor carries the risk an employee does not: gaps between contracts, unpaid invoices, and no unemployment insurance if the work stops.
The practical way to use the tool above is to enter the take-home you want and let it solve for the revenue needed, then add the annual cost of the benefits you would be replacing directly into the overhead field. That produces a rate grounded in your own circumstances rather than a rule of thumb. Our comparison of 1099 vs W-2 status covers the classification rules and the non-financial differences.
A worked example
An employee earning $100,000 pays $7,650 of Social Security and Medicare and $13,170 of federal income tax, taking home $79,180. A contractor doing the same work bills $102,221.93.
Their self-employment tax is $14,443.50 — $6,793 more than the employee's FICA — but half of it is deductible above the line, and the 20% QBI deduction removes a further $15,780, cutting taxable income to $63,120.14 and federal income tax to $8,598.43.
Total federal tax is $23,041.93, and take-home is $79,180: exactly the same. The contractor needed a 2.2% premium to match on tax.
To match on benefits — insurance, a 4% retirement match, and four weeks of paid leave — they would need roughly $25,000 to $30,000 more.
Common mistakes to avoid
- Adding a flat 30% for tax. At $100,000 the federal tax difference is closer to 2%, because the QBI deduction offsets most of the extra self-employment tax.
- Ignoring benefits entirely. Health insurance, a retirement match, and paid leave are where the real gap sits, and they are worth far more than the tax difference.
- Assuming the QBI deduction always applies. It phases out above $201,775 for single filers in 2026 and is restricted for some service businesses, which changes the comparison for high earners.
- Forgetting that gaps between contracts are unpaid. An employee's salary continues between projects; a contractor's revenue does not, and no unemployment insurance backs it.
- Comparing a contract rate to a salary without converting for utilization. If the contract is not full-time and continuous, the annual figures are not comparable at all.
Frequently asked questions
How much more should a 1099 contractor charge than a W-2 salary?
On federal tax alone, only about 2% at the $100,000 level, because the QBI deduction offsets most of the extra self-employment tax. The premium that actually matters is for benefits: health insurance, a retirement match, paid leave, and unemployment protection commonly add 25% to 40%. Price those specifically rather than applying a blanket markup — the figure depends heavily on whether you have coverage elsewhere.
Do 1099 contractors really pay more tax than employees?
They pay much more self-employment tax and much less income tax, and at moderate incomes the two roughly cancel. A contractor pays the full 15.3% on 92.35% of profit rather than the employee's 7.65%, but gets an above-the-line deduction for half of it plus the 20% QBI deduction. At $100,000 the total federal tax works out close to identical for the same take-home.
What is the QBI deduction worth to a contractor?
Up to 20% of qualified business income, capped at 20% of taxable income before the deduction. At $102,222 of contractor revenue it removes $15,780 of taxable income — worth roughly $3,500 in tax at that level, which is most of what makes the contractor and employee comparison come out even. It phases out above $201,775 for single filers in 2026 and is limited for certain service businesses.
What benefits do I lose going from W-2 to 1099?
Employer-subsidised health insurance, any retirement plan matching contribution, paid holiday and sick leave, unemployment insurance, workers' compensation, and often equipment, software, and training budgets. You also lose the employer's half of Social Security and Medicare — that is the 7.65% that becomes yours. Cost each of these out for your own situation and add the total to your overhead before setting a rate.
Is it better to be a 1099 contractor or a W-2 employee?
Financially it depends almost entirely on benefits and on the continuity of the work, not on tax. A contractor with coverage through a spouse and a steady pipeline can come out well ahead at a modest premium. Someone insuring a family alone, with gaps between contracts, needs a large premium to break even. The tax difference — the thing most people focus on — is the smallest term in the comparison at typical incomes.
Sources
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