Contract vs Permanent Calculator
Find the 1099 hourly rate that actually breaks even against a W-2 salary — using your benefits, your expenses and the hours you will really bill, not a rule of thumb someone repeated on a forum.
How the break-even is calculated
A salary and a contract rate are not the same kind of number. A salary is a package: cash, a bonus you mostly expect, money your employer quietly puts into your retirement account and your health premium, and weeks you are paid for without working. A contract rate is a price for an hour, and nothing else.
Turning the package into a price per hour takes two steps. First, work out what a contract year has to produce: the cash you are replacing, plus what you now buy yourself (retirement contributions to replace the match, health cover at what you would pay, the replacement cost of anything else you actually used), plus business expenses, plus the employer half of payroll tax that a company used to pay on your behalf. Second, divide by the hours you will genuinely bill — not 2,080. Subtract the weeks you will take off, then subtract the weeks between contracts. That second subtraction is the one people leave out, and it is the main reason contractors under-price themselves.
The multiplier is two factors, not one
The headline number here is the multiplier: the break-even rate divided by the salary’s naive hourly equivalent. It always decomposes into two independent pieces.
- Cost gross-up = required annual billings ÷ base salary. Driven by the bonus you are replacing, how rich the benefits are, what your own health cover costs, and what you spend to operate. On a bonus-heavy package that bonus is the largest part of it, because the ratio is against base alone.
- Utilization factor = 2,080 ÷ the hours you actually bill. Four unbilled weeks is 1.08× on its own; eight weeks is 1.18×.
Multiply them and you get the multiplier. This matters because two people can both land on 1.4× for opposite reasons, and the fix differs. If your gross-up is high, you are arguing about the rate. If utilization is the problem, no rate fixes it — you have a pipeline problem, and a higher price on fewer hours may not close the gap.
A worked example, end to end
These are the numbers the calculator loads with, so you can reproduce every figure.
The salaried job. $100,000 base; $5,000 target bonus; $3,000 a year of employer 401(k) contribution; the employer pays $600 a month of the health premium ($7,200 a year); $1,200 a year of life cover, disability and an ESPP discount; twenty-five paid days off. Total compensation $116,400, or $55.96 an hour across 2,080 hours.
The contract. Comparable health cover costs you $550 a month ($6,600 a year). You put $3,000 into a solo 401(k) to replace the match. Business expenses — liability insurance, accounting, entity fee, software, hardware — run $3,600. You bill 40 hours a week, take two weeks off, and expect two weeks between contracts: 48 billable weeks, or 1,920 hours.
Cash and benefits to replace: $100,000 + $5,000 + $3,000 + $6,600 + $1,200 = $115,800. Grossing that up for the employer half of self-employment tax gives $124,602.92 of net profit, so the tax line is $8,802.92. Add $3,600 of expenses and the year must produce $128,202.92 in billings. Over 1,920 hours that is $66.77 an hour, or $534.18 a day. The salary alone is $48.08 an hour, so the multiplier is 1.39× — 1.282× of cost gross-up times 1.083× of utilization. An offer of $75 an hour clears break-even by $8.23 an hour, about $15,797 across the year, and is worth roughly a $114,681 base salary on these assumptions.
Four mistakes that make these numbers wrong
Each one below is worth real money, and each shows up in calculators that are free but not careful.
1. Grossing up by the full 15.3%
You already pay half of FICA as an employee — 6.2% Social Security and 1.45% Medicare come out of a W-2 paycheck. Only the employer’s matching half is new when you go 1099, and it is charged on 92.35% of net profit, so the real gross-up is about 7.06%. Using 15.3% turns the example above from $66.77 into $72.11. Being wrong in your own favour is still being wrong: it costs you credibility when a client does the arithmetic.
2. Counting health cover twice
Adding what your employer contributes and what you would pay yourself is double counting. The employer’s share tells you what the job is worth; the premium you would actually pay is what the break-even needs. Adding both takes the example from $66.77 to $70.81 — a fictional $4 an hour.
3. Counting paid time off twice
The subtle one. A salary pays the same whether you take your twenty-five days or not, so paid time off is not extra money on top of it — it belongs in the hours you cannot bill, not the dollars you need. Count it as both, $9,615 of “PTO value” on the billings and weeks removed from the denominator, and the example jumps to $71.78. This calculator puts time off in the denominator only, and says so under the results.
4. Assuming you bill every week
At 2,080 billable hours the example needs $61.64. At 1,920, $66.77. At 1,760 — eight unbilled weeks, which is one contract ending badly — $72.84. Nothing about your costs changed; the same money is spread over fewer hours. The sensitivity table in the results shows this for your own numbers, and it is usually the largest single lever on the page.
Edge cases worth knowing
High earners hit the wage base. Social Security stops applying above the annual wage base ($184,500 for 2026); Medicare never does. Below the base, the employer half you now carry costs about 7.06 cents on each dollar of net profit; above it, 1.34 cents. So the payroll-tax part of the gross-up shrinks as income rises — it is about 6.9% of required billings in the example above, and a smaller share the more you bill. The calculator switches over automatically at whatever wage base you enter.
A spouse’s plan changes everything. Health cover is often the biggest single line. If you can join a partner’s plan cheaply, the example break-even falls from $66.77 to $63.07. If you cannot, get a real marketplace quote for your household and age — guessing here moves the answer more than any tax detail. And do not inflate the package with a gym subsidy or tuition benefit you were never going to use.
Part-year contracts. A six-month engagement is not half a year of the above. Enter the weeks you will actually bill across the whole year, including what you expect to do with the other six months.
Classification is a legal test, not a preference. Neither you nor a client can simply decide you are a contractor. The IRS uses a common-law control test; the Department of Labor uses an economic reality test under the FLSA; several states apply stricter tests. Misclassification is primarily the client’s liability, but it lands on you too, through back taxes, unpaid overtime claims and benefits you should have had.
Unemployment. Contractors are generally not eligible for unemployment benefits, and there is no severance. That is a real risk this calculator cannot price — a reason to want margin above break-even rather than merely to reach it.
What this deliberately does not model
- Income tax and take-home pay. The same income is taxed broadly the same either way, which is why the difference lives in payroll tax and benefits.
- The QBI deduction under Section 199A, which can favour 1099 income but depends on taxable income, filing status and line of business.
- W-2-through-an-agency and corp-to-corp. Different regimes, different tax treatment, different answers.
- State and city taxes, including gross-receipts and business-privilege taxes on the self-employed.
- Retirement contribution limits. A solo 401(k) or SEP usually lets you shelter more than a workplace plan — a genuine point in favour of contracting that this tool does not score.
- Equity, vesting, RSU refreshes and bonus multipliers above target.
- Premium subsidies, HSA treatment and the self-employed health insurance deduction.
- Career effects: references, promotion tracks, visa sponsorship, and how each option reads on a resume.
Once you have a rate you can defend, sanity-check it against your wider practice with the freelance rate calculator, convert between pay periods with the salary to hourly calculator, and price the benefits side properly with the 401(k) match calculator.
Sources for every constant used: Social Security wage base of $184,500 for 2026 — SSA, Contribution and Benefit Base. FICA rates of 6.2% and 1.45% per side, 15.3% combined for the self-employed — IRS Topic No. 751. Net earnings from self-employment at 92.35% of net profit — IRS Topic No. 554. Additional Medicare Tax of 0.9% above $200,000 single / $250,000 married filing jointly, shown as a note and not applied because employees pay it too — IRS Topic No. 560. Worker classification — IRS independent contractor guidance and US Department of Labor misclassification guidance. Estimates for comparison only. Not tax, legal or employment advice.
Related tools
Contract vs permanent FAQ
Is the "add 25 to 50 percent" rule right?
Why is the whole 15.3% self-employment tax not added to my rate?
How many billable hours should I assume?
Should I count paid time off as extra salary?
Does this work for a W-2 contract role through an agency?
What about the QBI deduction?
Can I just choose to be a 1099 contractor?
Does clearing the break-even mean the contract is the better deal?
Ready to put your application together?
Every tool is free, runs in your browser, and needs no account. Start with the resume builder or jump straight to a cover letter.