# 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.

## Key takeaways

- Compare total yearly cost, not hourly rate. A sub's rate already covers their payroll-type taxes, insurance and truck.
- The break-even sub rate is the employee's total cost divided by hours. In the example it's $34.49 an hour.
- Worker classification is set by the relationship (who controls how the work is done), not by cost or by what you call it.
- For payments made in 2026, a Form 1099-NEC is generally required once you pay a non-employee $2,000 or more for services in the year.

> **Estimate, not tax or legal advice**
>
> This compares costs. It doesn't decide whether a worker is an employee or a contractor; that depends on the facts of the relationship under IRS, Department of Labor and state rules, which can differ. Talk to a CPA or employment attorney before you classify anyone.

## 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.

**Formula**

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

Where:
- W-2 total cost = wages + 7.65% employer FICA + FUTA + SUTA + workers' comp + benefits + gear
- Sub admin cost = your cost to manage the sub: W-9, insurance certificates, 1099 filing
- Hours = hours of work you need done in the year

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. **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. **Get the sub's rate.** Use the hourly rate, or divide a quoted job price by the hours it will take.
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.

> **Worked example**
>
> A plumbing shop needs about 1,500 hours of help a year. An employee at $28 an hour earns $42,000; with employer taxes of $3,498, workers' comp of $1,890 and example benefits and gear, the total is **$51,988**.
>
> A licensed sub charges $45 an hour: $67,500, plus $250 of paperwork = **$67,750**.
>
> The employee costs $15,762 less. The sub would need to charge under $34.49 an hour to win on cost. At $32 an hour, the sub would save $3,738.

## Sub rate vs. employee cost at different rates

**Yearly cost for 1,500 hours (example employee at $28/hour)**

| Sub hourly rate | Sub total | Employee total | Cheaper option | Gap |
| --- | --- | --- | --- | --- |
| $30 | $45,250 | $51,988 | 1099 sub | $6,738 |
| $35 | $52,750 | $51,988 | W-2 employee | $762 |
| $40 | $60,250 | $51,988 | W-2 employee | $8,262 |
| $45 | $67,750 | $51,988 | W-2 employee | $15,762 |
| $55 | $82,750 | $51,988 | W-2 employee | $30,762 |

_Computed with 2026 federal payroll tax rates and the example state, workers' comp and benefit inputs above._

## 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](https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee):

**IRS common-law control test**

| Category | Question | Trades example pointing to employee |
| --- | --- | --- |
| Behavioral | Do you control, or have the right to control, what the worker does and how? | You set their hours, assign their calls each morning and train them on your install method. |
| Financial | Do you control the business side: pay, expenses, tools? | You pay hourly, supply the truck and tools, and reimburse expenses. |
| Type of relationship | Are there employee-type benefits, an ongoing relationship, work that's key to your business? | They work only for you, indefinitely, doing your core service. |

_Source: IRS, Independent contractor (self-employed) or employee? If it's still unclear, either party can file Form SS-8 for an IRS determination. State law may use a stricter test._

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

**What you file**

|  | W-2 employee | 1099 subcontractor |
| --- | --- | --- |
| Before work starts | Form W-4 and Form I-9 | Form W-9; certificate of insurance |
| During the year | Withhold and deposit payroll taxes; file Form 941 quarterly | Nothing for federal payroll tax |
| After year end | Form W-2 and Form 940 (FUTA) | Form 1099-NEC if you paid $2,000 or more in 2026 |

_Sources: IRS Publication 15 (2026); Instructions for Forms 1099-MISC and 1099-NEC. The 1099 threshold was $600 for payments made in 2025._

BRIX tracks your subcontractors and what you've paid them, keeps W-9s and payments synced with QuickBooks, and flags who needs a 1099 at year end. BRIX doesn't decide worker classification or give tax advice.

- [Bookkeeping and tax help](https://www.brix.so/features/bookkeeping-taxes): Keeps expenses categorized, tracks 1099 subcontractors and sales tax, and reminds you of quarterly estimated tax dates. BRIX does not file taxes or give tax advice.
- [QuickBooks sync](https://www.brix.so/integrations/quickbooks): Syncs customers, invoices and payments with QuickBooks so the books match the jobs.

## Frequently asked questions

### Is it cheaper to pay someone 1099 or W-2?

Only if the sub's rate is below the employee's true hourly cost. In this page's example the break-even is $34.49 an hour against a $28 wage. Classification isn't a choice you make on cost, though; it follows from how much you control the work.

### How much more should a 1099 contractor charge than an employee earns?

Enough to cover both halves of Social Security and Medicare (15.3% self-employment tax on most profit), their own insurance, truck, tools and unpaid time, plus profit. In the example, a $45 sub keeps about $31.77 an hour before income tax.

### Can I pay my helper as a 1099 contractor?

Probably not, if you set their schedule, tell them how to do the work, supply the tools and they work only for you. Those facts point to an employee under the IRS common-law test. If unsure, ask a CPA or file Form SS-8.

### Do I need to send a 1099 to a subcontractor in 2026?

Generally yes, if you paid a non-employee $2,000 or more for services in the course of your business during 2026. The threshold rose from $600 for payments made after 2025. Payments to corporations are generally exempt, with exceptions such as attorneys.

### What happens if I misclassify an employee as a contractor?

Without a reasonable basis, the IRS can hold you liable for the employment taxes you should have withheld and paid, and states may assess unemployment tax and workers' comp premiums. Penalties and interest can follow.

### Do 1099 subcontractors need their own insurance?

You should require a certificate of insurance before they start. If an uninsured sub is hurt on your job, your workers' comp carrier may count their pay as your payroll at audit, which raises your premium.

## Related

- [W-2 vs. 1099: What's the Difference for Contractors?](https://www.brix.so/learn/w2-vs-1099)
- [Do I Need to Send a 1099 to a Subcontractor?](https://www.brix.so/learn/1099-for-subcontractors)
- [What Is a W-9 for Subcontractors?](https://www.brix.so/learn/w9-for-subcontractors)
- [True Cost of an Employee Calculator for Trades Businesses](https://www.brix.so/tools/payroll-cost-calculator)
- [Labor Burden Calculator](https://www.brix.so/tools/labor-burden-calculator)
- [What Are Payroll Taxes?](https://www.brix.so/learn/payroll-taxes)
- [What Is a Certificate of Insurance?](https://www.brix.so/learn/certificate-of-insurance)
- [How to Hire Technicians and Build a Pay Plan That Works](https://www.brix.so/guides/hire-and-pay-technicians)
- [Missed Call Revenue Calculator](https://www.brix.so/tools/missed-call-calculator)
- [Customer Lifetime Value Calculator](https://www.brix.so/tools/customer-lifetime-value-calculator)

## Sources

- [IRS, Independent contractor (self-employed) or employee?](https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee) (checked 2026-10-12)
- [IRS, Independent contractor defined](https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined) (checked 2026-10-12)
- [IRS Publication 15 (Circular E), Employer's Tax Guide, for use in 2026](https://www.irs.gov/pub/irs-pdf/p15.pdf) (checked 2026-10-12)
- [IRS Instructions for Forms 1099-MISC and 1099-NEC](https://www.irs.gov/pub/irs-pdf/i1099mec.pdf) (checked 2026-10-12)
- [IRS Topic No. 554, Self-Employment Tax](https://www.irs.gov/taxtopics/tc554) (checked 2026-10-12)

---
Written by BRIX Editorial Team. Last updated 2026-10-12. General information, not tax, legal or financial advice.
Canonical: https://www.brix.so/tools/1099-vs-w2-calculator