A recruiter floats a contract role, and the headline number usually dwarfs the salaried version of the same job. Sometimes the contract really is the better deal. But only after you account for everything a W-2 employer quietly hands you. Here's how to weigh them honestly.

What a W-2 employer covers for you

  • Half of payroll taxes (7.65% of wages).
  • Health insurance, often heavily subsidized.
  • Retirement matching in many cases.
  • Paid time off, holidays, and sick leave.
  • Unemployment and workers' compensation coverage.
  • Sometimes equipment, software, and training.

As a 1099 contractor, every line above turns into your expense or your loss.

The self-employment tax gap

Payroll tax is the most concrete difference. A W-2 employee pays 7.65%. A contractor pays the full 15.3% self-employment tax on net earnings. That gap alone means a contract rate has to sit meaningfully higher just to break even on taxes.

A fair comparison method

To compare honestly, boil both offers down to the same thing: take-home pay after taxes and benefits.

  1. Start with the gross figure of each offer.
  2. For the 1099 role, subtract the extra employer-side payroll tax, the cost of buying your own health insurance, and the retirement match you'd otherwise have gotten.
  3. Subtract unpaid time off. A contractor who takes three weeks off simply earns three weeks less.
  4. Compare what's left.

A common rule of thumb: a contract rate needs to be roughly 25–40% higher than a salary to deliver similar real value. The exact gap depends on your benefits and how much time off you take. Our 1099 vs W-2 Calculator runs it side by side.

What the math leaves out

Numbers aren't the whole story. Contracting brings flexibility, multiple clients, and higher ceilings. It also brings income volatility, no employer safety net, and a pile of admin work. The financial comparison tells you the price of that freedom. Whether it's worth paying is a personal call.

The trap to avoid

Never take a contract rate equal to your old salary's hourly equivalent and call it a lateral move. It's a pay cut in disguise. Run the comparison first, then negotiate from the real number.

Educational only, not financial advice.