Step 4 of 5 — Employee vs. contractor
Compare the true financial value of a W2 employee job versus 1099 independent contracting.
Per year
Per year
Software, office, equipment
W2 take-home: $70,350 · 1099 net: $75,238
| W2 Base Salary | $100,000 |
| W2 Benefits Value | $14,769 |
| W2 Total Compensation | $114,769 |
| W2 Take-Home (after tax) | $70,350 |
| 1099 Gross Income | $120,000 |
| 1099 Self-Employment Tax | $16,249 |
| 1099 Federal Income Tax | $23,513 |
| 1099 Net After Tax | $75,238 |
| Break-Even Contractor Rate | $143,462 |
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Freelancer Finances
Next Step: Plan retirement as freelancer
W2 Total Comp = Salary + Health Insurance + 401k Match + Vacation Value
1099 Net = Gross − Business Expenses − Self-Employment Tax (15.3%) − Federal Income Tax
SE Tax = Net Income × 92.35% × 15.3%. You can deduct half of SE tax from taxable income.
Contractors pay their own taxes, benefits, and overhead. An employee costing $80K/year (salary + benefits) may require a contractor billing $65-70/hour to match.
Add 20-30% for payroll taxes, benefits, and overhead. A $60K salary employee costs the employer $75K-$85K total.
Employees: ongoing work, need company culture, need training. Contractors: project-based, specialized skills, no long-term commitment needed.
Employees: employer controls how and when work is done. Contractors: control their own process. Misclassification leads to IRS penalties — be careful.
Employer pays: 7.65% FICA (SS + Medicare), FUTA (0.6-6%), state unemployment, workers' comp. Typically 10-15% of salary on top of wage.
Calculations are for educational purposes only. Consult a qualified financial advisor for personalized advice.