Contractor vs Employee
Compare after-tax economic value after payroll taxes, unpaid time, business expenses, and benefits.
Employee role
Employer benefits should include retirement, health, and paid leave value.
Contract work
Billable hours should exclude sales, administration, vacation, and gaps.
About the Contractor vs Employee
Switching from a salaried role to contract or freelance work — or comparing a contract offer to a staff position — requires accounting for self-employment tax, lost employer benefits, and the reality that not every hour worked is billable. This calculator estimates the after-tax economic value of each path so you can see what hourly rate actually replaces a given salary once payroll tax, income tax, benefits, and realistic utilization (billable hours per week and weeks worked per year) are factored in. It's built for professionals weighing a 1099 contract, consultants setting rates, or employees deciding whether a contract offer's headline hourly rate is genuinely competitive with a comparable staff role.
How this calculator works
The exact model, assumptions, and limitations used for this decision.
Employee value = salary − income tax − employee payroll tax + benefits. Contractor value = gross billings − business expenses − self-employment tax − income tax after the deductible half of SE tax.
Calculation steps
- Contract revenue multiplies hourly rate by realistic billable hours and billable weeks.
- Business expenses are removed before tax; self-employment tax uses the effective rate entered by the user.
- One-half of modeled self-employment tax reduces contractor income subject to the entered income-tax rate.
Important assumptions
- Payroll-tax inputs reflect wage caps and the user's combined income situation.
- The contractor is properly classified and can deduct entered ordinary business expenses.
- QBI, retirement deductions, state payroll programs, and additional Medicare tax are not automatic.
Frequently asked questions
Common questions about inputs, assumptions, and interpreting the result.
01Why are billable hours lower than hours worked?+
Contractors spend time on sales, administration, invoicing, training, and gaps between projects. Only client-billable hours generate the entered hourly revenue.
02Why is the default contractor payroll-tax rate about 14.13%?+
Generally 92.35% of net self-employment earnings is subject to the 15.3% combined rate, producing about 14.13% before wage caps and additional Medicare tax.
03How should employee benefits be valued?+
Include employer health contributions, retirement match, paid leave, disability coverage, and other benefits you would need to replace as a contractor.
04Does an LLC eliminate self-employment tax?+
Not automatically. Entity choice, reasonable compensation, state rules, and tax elections are complex. Obtain professional advice before changing structure.
05Does the result include paid vacation?+
Employee paid leave belongs in benefit value. Contractor unpaid leave is represented by using fewer billable weeks.
06What contractor rate should I negotiate?+
Use the displayed result to test rates until after-tax contractor value covers benefits, nonbillable time, expenses, and the risk premium you require.
07Should retirement contributions be included?+
Yes. Add the employer's retirement match to employee benefits, and any solo 401(k) or SEP-IRA contribution capacity you plan to actually use to contractor value, since both represent real economic value.
08How do I handle health insurance as a contractor?+
Estimate the full premium and expected out-of-pocket cost for a marketplace or COBRA plan, then subtract it from contractor value, or add the equivalent employer contribution to the employee side for consistency.