1. Scope
Compares the fully-loaded annual cost of filling a role as a W-2 employee versus a 1099 contractor at a given hourly rate. US-only defaults. Not legal advice — classification is governed by IRS and state tests the tool does not evaluate.
2. Inputs and outputs
Inputs
- employeeSalary number (currency/year)
- employerTaxRate percent default: 7.65
- benefitsPercent percent default: 25
- contractorHourlyRate number (currency)
- contractorHoursPerYear number default: 2000
Outputs
- employeeTotal
Fully-loaded W-2 annual cost.
- contractorTotal
Hourly rate × hours.
- breakevenHourlyRate
Hourly rate at which contractor cost equals employee total.
- savings
employeeTotal − contractorTotal.
Engine source: src/lib/contractor-vs-employee-calculator/engine.ts
3. Formula / scoring logic
employee_total = salary * (1 + employer_tax + benefits)
contractor_total = hourly_rate * hours
breakeven_rate = employee_total / hours4. Assumptions
- Assumes correct classification under IRS common-law test. Mis-classification exposes the payer to back-taxes and penalties — consult a qualified professional.
- Contractor rate is the gross billable rate; the tool does not model contractor-side self-employment tax or benefits.
- Does not include equipment, training, or onboarding differences between W-2 and 1099 engagements.
5. Data sources
6. Known limitations
- The ABC test (California AB5, and similar state statutes) imposes stricter classification than federal common-law. The tool does not evaluate jurisdictional tests.
- Contractors typically charge a premium to cover their own taxes and benefits; hour-for-hour comparisons understate that premium.
7. Reproducibility
Input
salary = $100,000, employerTax = 7.65%, benefits = 25%, contractorRate = $75/hr, hours = 2000.
Expected output
employee_total ≈ $132,650, contractor_total = $150,000, breakeven ≈ $66.33/hr.
8. Change log
- 2026-04-24 methodology page first published.