W-2 Employee vs 1099 Contractor Cost
How to compare the two fairly — and find the rate where they break even.
A 1099 contractor's headline rate almost always looks higher than an employee's wage. But that's not a fair comparison: the contractor's rate already covers costs you'd otherwise pay on top of an employee's wage. To decide which is cheaper, compare the contractor's rate against the fully-loaded cost of the employee — not the bare wage.
What an employee costs that a contractor doesn't
With a W-2 employee, you pay the wage plus:
- Employer payroll taxes — Social Security, Medicare, FUTA, and SUTA.
- Workers' compensation insurance.
- Benefits — health, dental, vision, life, disability, retirement match.
- Paid time off, overhead, equipment, and onboarding.
A true 1099 contractor generally carries none of these on your books — they cover their own taxes, insurance, and tools, which is why their billed rate is higher. They also typically supply their own equipment and absorb their own downtime.
The right way to compare
Put both on the same basis — total dollars per year, or cost per hour:
| Basis | W-2 employee | 1099 contractor |
|---|---|---|
| Headline rate | $25/hr wage | $45/hr billed |
| Employer taxes & comp | included below | $0 to you |
| Benefits & overhead | included below | $0 to you |
| True annual cost | ~$80,000 | ~$93,600 |
In this example the contractor at $45/hour actually costs more per year than the fully-loaded employee — the opposite of what the raw rates suggest. Change the hours, benefits, or trade and the answer flips, which is exactly why you should run your own numbers.
The break-even rate
Divide the employee's fully-loaded annual cost by the contractor's expected hours to find the hourly rate at which the two are equal. Below that rate, the contractor is cheaper; above it, the employee is. Our calculator does this for you in the W-2 vs 1099 section. For a 2,080-hour year, an $80,000 loaded employee breaks even against a contractor at about $38/hour — so a $45 contractor is more expensive, while a $32 contractor would be cheaper.
Classification risk: cost isn't everything
Cheaper on paper does not make someone a legal contractor. The IRS and state agencies use behavioral, financial, and relationship tests to decide whether a worker is truly independent. Misclassifying an employee as a 1099 contractor to save on taxes and benefits can trigger back taxes, penalties, and liability if you're audited. Control over how, when, and where the work is done is the classic red flag.
Beyond cost
Even when the numbers are close, control, scheduling, training investment, continuity, and availability matter. Employees are usually better for core, ongoing, closely-supervised work; contractors shine for specialized, project-based, or overflow work. Decide on the whole picture — then confirm the relationship legally qualifies before you commit.
Compare W-2 vs 1099 for your role →