1099 vs. W-2 Cost Calculator: Employee or Subcontractor?

A W-2 employee costs wages plus employer payroll tax (7.65%), unemployment tax, workers' comp and benefits. A 1099 subcontractor costs their rate, and they pay their own 15.3% self-employment tax. Subs aren't always cheaper: in this page's example, an employee at $28 an hour costs $15,762 less than a $45 sub.

Is it cheaper to hire a 1099 contractor or a W-2 employee?

It depends on the rate the sub charges compared with what the employee really costs you. An employee's real cost is wages plus about a fifth or more on top for payroll taxes, workers' comp, benefits and gear. A sub's rate has to cover the same kinds of costs for themselves, plus their profit, so their hourly rate is usually higher than an employee's wage.

Break-even sub rate = (W-2 total cost − sub admin cost) ÷ hours

1. 1

   Estimate the hours.

   How many hours of work do you need covered in a year? Use last year's overflow or a seasonal estimate.

2. 2

   Price the employee.

   Wage, your state unemployment rate and wage base, workers' comp rate, benefits and gear. The calculator adds employer FICA and FUTA.

3. 3

   Get the sub's rate.

   Use the hourly rate, or divide a quoted job price by the hours it will take.

4. 4

   Compare and check break-even.

   If the sub charges less than the break-even rate, they cost less on paper. Then check whether the relationship really is a contractor relationship.

Sub rate vs. employee cost at different rates

What does each worker keep?

Before income tax, the employee keeps $25.86 of each $28 hour after their 7.65% share of Social Security and Medicare. The sub keeps about $31.77 of each $45 hour after $8 of their own truck, tool and insurance costs and 15.3% self-employment tax on 92.35% of the rest. That's why good subs charge well above employee wages: they're paying both halves of payroll tax and running a business.

How does the IRS decide employee vs. independent contractor?

The general rule is that someone is an independent contractor if you control or direct only the result of the work, not what will be done and how. The IRS looks at the whole relationship in three categories:

If you treat an employee as a contractor without a reasonable basis, the IRS can hold you liable for the employment taxes for that worker. Your state may also go after unemployment tax and workers' comp premiums. The money saved in the calculator can disappear fast.

When a 1099 sub makes sense

• Specialty work you don't do in-house: a licensed electrician on a remodel, a crane operator, a concrete cutter.
• True overflow where the sub runs their own business, sets their own methods and works for other contractors too.
• Seasonal peaks that don't justify a year-round hire, with a sub who brings their own crew and equipment.
• Not for someone you schedule daily, train, equip and supervise like the rest of your crew.

Paperwork for each