Contractor vs Employee Cost Calculator

How it works

A W-2 employee costs the business their salary plus the employer's payroll taxes, benefits and other per-employee costs, and is paid for holidays and vacation as well as the hours they work. A 1099 contractor is paid only for the hours billed and the business pays no payroll tax or benefits on them. To compare like with like, the calculator prices both for the same hours of work: the employee's paid hours minus their paid days off.

The employer's payroll taxes are 6.2% Social Security on salary up to the wage base ($184,500 for 2026) and 1.45% Medicare (IRS Publication 15), FUTA at 0.6% of the first $7,000 after the usual state credit (IRS Tax Topic 759), and the state unemployment rate you enter. The contractor rate that costs the same is the employee's total annual cost divided by the hours worked.

Whether a worker is an employee or a contractor is a legal question, not a cost question. The IRS ("Independent contractor (self-employed) or employee?"), the Department of Labor and, in many states, state law tests decide it from the working relationship (who controls how, when and where the work is done, and whether the worker is in business for themselves), not from which option is cheaper.

Formula

hours worked      = hours per week × (260 − paid days off) ÷ 5
payroll taxes     = 6.2% × min(salary, wage base) + 1.45% × salary
                    + FUTA rate × min(salary, $7,000) + SUTA rate × min(salary, SUTA base)
employee annual   = salary + payroll taxes + benefits + other costs
employee hourly   = employee annual ÷ hours worked   (= salary × (1 + burden) ÷ hours worked)
contractor annual = contractor rate × hours worked
break-even rate   = employee hourly

Example

A $70,000 salary carries $4,340 of employer Social Security, $1,015 of Medicare, $42 of FUTA and $189 of SUTA (2.7% of $7,000), $5,586 of payroll taxes. With $12,000 of benefits and $3,000 of other costs the employee costs $90,586 a year, a 29.41% burden.

With 15 paid days off the employee works 1,960 hours, so each hour worked costs $46.22. A contractor at $55 an hour for the same 1,960 hours costs $107,800, which is $17,214 a year more; a contractor rate of $46.22 would cost the same.

Assumptions and limitations

• Results are for informational and educational purposes and are not legal, tax or employment advice. Classifying a worker as a contractor when the relationship is employment can bring back taxes, penalties and benefit claims; the classification is set by the law, not by this comparison.
• The benefits, SUTA and other-cost defaults are illustrative; your own figures replace them.
• The contractor is assumed to work exactly the employee's hours worked at a flat hourly rate, with no agency fee, minimum engagement or extra management time. The employee is assumed to be equally productive in every hour worked.
• Federal payroll tax figures are from IRS Publication 15 (2025 and 2026) and Tax Topic 759. Overtime, bonuses, a partial year and the cost of recruiting or ending either arrangement are not modelled.

Frequently asked questions