How the calculation works
Contractor take-home = contract rate − business expenses − SE tax − federal income tax − state income tax − retirement contribution.
W2 take-home = salary − employee FICA − federal income tax − state income tax − retirement contribution.
SE tax (self-employment tax) is 15.3% on 92.35% of net profit — the combined employer-and-employee shares of Social Security (12.4%, capped at the $184,500 2026 SS wage base) and Medicare (2.9%). Half of SE tax is deductible from gross income. W2 employees pay only the employee share (7.65%) because the employer covers the other half separately.
The break-even contract rate is found by binary search: the rate at which contractor take-home equals W2 take-home plus the value of W2 benefits entered. Below that rate, the W2 offer is the better deal on cash.
Uses 2026 federal brackets (IRS Rev. Proc. 2025-32) and the 2026 standard deduction.
Worked example
A single filer in Texas comparing an $80,000 W2 salary to a $100,000 1099 contract rate, with $12,000 in lost benefits, $3,000 in business expenses, and 10% retirement contributions to both accounts:
| Item | W2 ($80k) | 1099 ($100k) |
|---|---|---|
| FICA / SE tax | $6,120 (employee only) | $13,706 (both halves) |
| Retirement contribution (10%) | $8,000 | $9,700 |
| Federal income tax | $7,010 | $8,868 |
| Take-home | $58,870 | $64,726 |
| Effective tax rate | 26.41% | 35.27% |
At the default inputs, the 1099 contract produces $5,856 more take-home than the W2 — not because contracting is inherently better, but because $100,000 is meaningfully more than $80,000. The contractor's higher effective tax rate reflects the self-employment tax burden.
The break-even rate answers: "What contract rate would I need to match the W2 take-home plus the $12,000 in lost benefits?" That's the number to use in salary negotiations or when deciding whether to accept a contract offer.
Assumptions and limitations
- State income tax is modeled for nine no-income-tax states and six flat-rate states. All others show federal-only results with a notice.
- Head-of-household bracket thresholds below the 24% band are estimated from 2025 values, not directly verified against the final 2026 IRS table.
- The QBI (Qualified Business Income) deduction, self-employed health insurance deduction, and deductible retirement plan contributions beyond the flat percentage input are not modeled. All three can meaningfully reduce a contractor's taxable income.
- This models a flat annual contract rate, not an hourly rate with variable utilization. Enter your expected annual earnings if billing is irregular.
Frequently asked questions
- Why is the 1099 effective tax rate so much higher than W2?
- As a sole proprietor you pay both the employer and employee shares of FICA — roughly 7.65 percentage points more than a W2 employee. The deduction for half of SE tax reduces income tax slightly, but it doesn't offset the whole difference.
- What should I enter for "value of W2 benefits"?
- The annual cost to replace the benefits you'd lose: health insurance premiums (your share would rise to the full premium), employer 401(k) match, paid time off (imputed as lost billable time), and dental/vision. A common starting range is $10,000–$20,000 for comprehensive employer-sponsored coverage.
- Can I compare a part-time contract to a full-time salary?
- Yes. Enter the part-time contract's annualized earnings. The calculator operates on annual figures, so scale up if you're comparing a 6-month engagement.
Sources
- IRS, Rev. Proc. 2025-32 — 2026 inflation-adjusted tax amounts (accessed 2026-09-26)
- Social Security Administration — 2026 Social Security Changes (accessed 2026-09-26)