Common questions answered directly.
A common rule of thumb is 1.4-1.5x the equivalent salary to break even after self-employment tax, benefits, and business expenses. So a $100,000 W2 salary typically requires $140,000-$150,000 in contractor revenue to net the same take-home. Use the calculator for your specific numbers.
W2 employees have taxes withheld by the employer, who also pays half of Social Security and Medicare (7.65%). 1099 contractors pay both halves themselves (15.3% self-employment tax), plus quarterly estimated income tax. This is the biggest source of "sticker shock" for new contractors.
Ask HR for the employer contribution amount — what they pay toward your premium, not what you pay. This is a real dollar benefit. To replace it as a contractor, you'd pay the full premium yourself, typically $400-900/month for individual coverage. That's $5,000-11,000/year of contractor revenue just to cover health insurance.
Contractors can save more in tax-advantaged accounts (a Solo 401k allows total contributions of roughly $66,000–$70,000 a year, depending on the tax year, vs about $23,000 in employee deferrals for a W2 employee — check IRS limits for the current year), but they fund it entirely themselves. Employees often get employer matching which is free money. Factor in the employer match value when comparing.
Business-use expenses: home office, business internet, professional software, equipment, professional development, health insurance premiums, retirement contributions, and a portion of vehicle costs if used for business. These deductions reduce taxable income, which is why the after-deduction tax rate for contractors can be lower than it first appears.
Yes — as a contractor, time off means no revenue. A $150/hr contractor who takes 3 weeks off earns less than the annual equivalent suggests. The calculator accounts for this through the implied annual revenue figure rather than an hourly rate.
Use the salary vs contractor calculator — free, no email required.