W-2 vs 1099: Which Pays More? (With Real Numbers)

A W-2 job usually pays more than a 1099 contract at the same headline number, because an employer quietly covers costs a contractor has to pay out of their own pocket. So the real question in W-2 vs 1099, which pays more, is how much higher the 1099 rate has to be before it actually comes out ahead.

Quick Answer: A 1099 contract needs to pay roughly 20% to 25% more per year than a W-2 salary just to break even, and closer to 40% more per hour. On a $90,000 W-2 job with a modest match and health coverage, the break-even contract is about $107,000 to $112,000. Anything below that is a pay cut.

Why does the same number pay less on a 1099?

Because a W-2 salary is only part of what your employer spends on you, and a 1099 rate has to cover all of it. On a W-2, your employer pays half of your Social Security and Medicare tax, usually subsidizes your health insurance, often matches your retirement savings, and pays you for holidays and vacation. On a 1099, every one of those lines becomes yours.

The biggest single line is payroll tax. As an employee you pay 7.65% and your employer pays the other 7.65%. As a contractor you pay both halves. The IRS sets the self-employment tax rate at 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, applied to 92.35% of your net profit. On $100,000 of contract profit, that is about $14,130 before a dollar of income tax.

Then add the benefits you now buy yourself. None of this makes a 1099 a bad deal. It just means the rate on the offer letter and the rate you actually earn are two different numbers, and only one of them is comparable to a salary.

What 1099 rate equals a $90,000 W-2 salary?

About $111,600, or 24% more, in a straightforward federal-only example. Let's say you're 30, single, and choosing between two offers for the same work. The W-2 job pays $90,000 with a 4% 401(k) match ($3,600), covers $7,000 of your health premium, and charges you $1,500 a year for your share. The contract pays a flat annual amount, and you'd spend about $2,000 a year on a laptop, software, and a tax preparer.

To compare them fairly, the contractor has to rebuild the same package: buy the full $8,500 health plan, put $3,600 into a solo 401(k), and still end up with the same cash. Using the 2026 brackets and the $16,100 standard deduction:

Line	W-2 at $90,000	1099 at $111,600
Gross pay	$90,000	$111,600
Business expenses	$0	-$2,000
Your health insurance cost	-$1,500	-$8,500
Retirement savings	$3,600 match, paid by employer	-$3,600 into a solo 401(k)
Social Security and Medicare	-$6,770	-$15,486
Federal income tax	-$10,640	-$10,917
Cash left, same coverage and same $3,600 saved	$71,090	$71,097

Notice the income tax barely moves even though the contract pays $21,600 more. That's because the contractor deducts half of their self-employment tax, their health premiums, and their retirement contribution before income tax is figured. The payroll tax line is where the money goes: $15,486 against $6,770.

Why the hourly gap is bigger than the annual one

Because a contractor isn't paid for days off, the break-even hourly rate is about 37% higher, not 24%. A W-2 salary of $90,000 over 2,080 hours is $43.27 an hour, and that includes paid holidays and vacation. Say the job gives you 15 PTO days and 10 holidays. A contractor who takes the same 25 days off bills only 1,880 hours, so earning $111,600 takes $59.36 an hour.

And 1,880 is optimistic. Contractors lose time to invoicing, finding the next client, and gaps between contracts. If you realistically bill 1,600 hours a year, the break-even rate climbs to about $69.75, which is 61% above the W-2 hourly figure. This is the number most people skip, and it's why a contract quoted at "$60 an hour, way more than I make now" can quietly be a pay cut.

If you're looking at a contract to add on top of a full-time job rather than replace it, the math is different. We run that version in whether a side hustle is worth it after taxes.

What does a 1099 give you that a W-2 doesn't?

Deductions and a bigger retirement account, which together can pull the break-even down by several thousand dollars. The qualified business income deduction lets many self-employed people knock up to 20% off their business income for income tax purposes. In the example above it would drop the break-even from about $111,600 to roughly $107,000, a 19% premium instead of 24%. It never touches self-employment tax, so treat it as a cushion rather than the plan.

The second advantage is the solo 401(k). You can defer up to the 2026 employee limit of $24,500, and then add an employer contribution on top as your own business. A W-2 employee gets the same $24,500 deferral limit, but the employer side depends entirely on how generous the company is. If you're a high saver, the contractor route can shelter noticeably more. Our guide to tax-advantaged accounts covers how the pieces stack.

The rest is real but harder to price: setting your own hours, working for several clients so one layoff doesn't zero your income, and raising your rate without waiting for an annual review.

What do you give up that never shows up in the rate?

Protection, mostly, and a tax calendar you now have to run yourself. Contractors generally can't collect unemployment when a contract ends, aren't covered by workers' comp, and have no employer disability insurance. If you'd lean on any of those, price a private disability policy into the rate and hold a bigger cash cushion than a salaried worker would. We'd aim for six months of expenses, the top of the range in our guide to how much emergency fund you actually need.

Taxes also stop being automatic. Nobody withholds from a 1099 payment, so if you expect to owe $1,000 or more for the year, you're expected to pay estimated tax four times a year rather than once in April. Set aside about 30% of every payment the day it lands.

One last check: make sure the 1099 label is legitimate. The IRS classifies workers by who controls the work, looking at behavioral control, financial control, and the relationship itself. If the company sets your hours, supplies your tools, and expects you to stay indefinitely, you may be an employee in everything but paperwork, and you're absorbing their payroll tax for them.

How to decide between a W-2 and a 1099 offer

Take the 1099 when it clears the break-even with room to spare, and take the W-2 when it doesn't. A simple rule works for most people: the contract should pay at least 25% more per year than the salary, or 40% more per hour, before it's even a tie. Above that, the contract is genuinely paying you more. Below it, you'd be trading pay for flexibility, which is a fine trade if you're making it on purpose.

Before you answer either offer, build the table above with your own numbers. Put the match, the health premium, and the paid days off in real dollars, the same way you'd compare salary against benefits between two W-2 jobs. At Planned, this is the first table we build when someone is weighing a contract offer, because comparing the gross numbers side by side is where this decision usually goes wrong. And if the contract comes in under break-even, that's not the end of it. It's a starting point for negotiating a higher rate.

Frequently Asked Questions

Is 1099 income taxed more than W-2 income?

Not at a higher income tax rate. Both use the same federal brackets. The difference is payroll tax: a contractor pays the full 15.3% self-employment tax instead of the 7.65% an employee pays, because there's no employer covering the other half. Half of that self-employment tax is deductible, which softens the gap without closing it.

Can I negotiate a 1099 rate to cover self-employment tax?

Yes, and you should. Companies that hire contractors save the employer half of payroll tax plus benefits, so a higher rate isn't a favor. Walk in with your break-even number, show the lines it covers, and ask for a rate above it. A contractor who quotes their old salary divided by 2,080 hours is leaving the difference on the table.

Can I be both W-2 and 1099 in the same year?

Yes. Plenty of people get a W-2 from a day job and 1099s from freelance work, or switch from one to the other mid-year. You file one return that includes both. The W-2 income has tax withheld already, so you can raise that withholding to cover the 1099 taxes instead of making separate quarterly payments.

What happens to my 401(k) if I switch from W-2 to 1099?

It stays yours. Your contributions are always yours, and any vested employer match goes with you. You can leave it in the old plan or roll it into an IRA or a new solo 401(k). Check the vesting schedule before you give notice, since leaving a few months early can forfeit unvested match dollars.

The bottom line

A 1099 rate and a W-2 salary aren't the same unit, so never compare them side by side. Convert the salary into what it really costs to replace, including payroll tax, health coverage, the match, and paid days off, and only take the contract when it clears that number with room to spare.