W-2 vs. 1099 Tax Comparison Calculator

• Both sides computed at the same gross income, including the employer benefits a contractor has to replace.
• Self-employment tax modelled properly, including the deductible half and the additional Medicare tax.
• The QBI deduction included, with the specified-service phase-out applied.
• An S-corp scenario available — presented with its costs and its risks, not as a free saving.

Where the money actually goes differently

Four things change when the same work is done as a contractor rather than an employee.

1. Payroll tax doubles from your perspective. An employee pays 6.2% Social Security on wages up to the annual wage base and 1.45% Medicare on everything, and the employer pays the same again — money that never appears on a payslip but is genuinely part of the cost of employing you. A self-employed person pays both halves as self-employment tax: 12.4% plus 2.9%, on 92.35% of net profit.

net earnings from self-employment = net profit × 0.9235

SE tax = 12.4% on net earnings up to the wage base
       + 2.9% on all net earnings
       + 0.9% additional Medicare above the statutory threshold

Half of the 12.4% + 2.9% portion is deductible against income tax.

The 0.9235 factor exists to approximate the fact that an employer's share of payroll tax is a deductible business expense, so the self-employed should not pay tax on it either.

2. Business expenses become deductible. Equipment, software, professional insurance, travel, professional fees and a qualifying home office reduce net profit — which reduces both income tax and self-employment tax. A deductible dollar is therefore worth substantially more to a contractor than to an employee, who generally cannot deduct unreimbursed work expenses at all.

3. The QBI deduction becomes available. Up to 20% of qualified business income can be deducted, and this is available on self-employment income but never on W-2 wages. For many contractors this is the single largest factor pulling the comparison in their favour.

4. Benefits stop arriving. Health insurance, retirement matching, paid leave, disability cover and life cover are real compensation that an employer provides and a contractor must replace. The calculator asks you to value them, because leaving them out is the most common way this comparison is rigged.

The qualified business income deduction

Section 199A allows a deduction of up to 20% of qualified business income, reducing taxable income without reducing self-employment tax. It was made permanent by the One Big Beautiful Bill Act, which also widened the phase-in range and added a minimum deduction from tax year 2026.

Below the taxable income threshold — $201,775 single and $403,500 married filing jointly for 2026 — the deduction is straightforward: 20% of qualified business income, capped at 20% of taxable income less net capital gain.

Above the threshold, two complications apply:

• Specified service trades or businesses — broadly health, law, accounting, consulting, financial services, performing arts, athletics and any business whose principal asset is the reputation or skill of its employees or owners — have the deduction phased out entirely across the range above the threshold. Tick the SSTB box above if this describes your work.
• Other businesses become subject to limits based on W-2 wages paid and the unadjusted basis of qualified property. This calculator does not model those limits, so above the threshold it may show a larger deduction than you would actually be allowed. That limitation is stated in your results as well as here.

The rules here are genuinely complicated and the interactions matter. Anyone near the thresholds should treat the figure as an indication and get it checked.

What a contract rate needs to be

A contractor offered the same number as a salary is being offered less, because they are absorbing costs the employer used to carry.

The gap has three components:

• The employer half of payroll tax — 7.65% of wages up to the wage base.
• Benefits — health premium contributions, retirement matching, paid leave, disability and life cover. Frequently 20%–30% of salary in total value.
• Unpaid time. A salaried employee is paid for holidays, sick days and slow periods. A contractor is paid for hours billed, and utilisation is rarely 100%.

Your results include an estimated rate premium needed to match the W-2 package on these inputs. Treat it as a starting point for a negotiation rather than a precise figure — the benefit valuation you enter drives it heavily, and only you know what your employer's package is actually worth to you.

Working against that: the QBI deduction and the deductibility of genuine business expenses can offset a meaningful part of the gap. This is why the comparison has to be run rather than assumed in either direction.

The S-corporation question

An S-corp election is frequently promoted as a way for the self-employed to reduce tax. The mechanism is real, and so are the conditions.

How it works. The business pays you a salary, subject to payroll tax. Remaining profit is distributed to you as a shareholder distribution, which is not subject to self-employment tax. On $150,000 of profit with an $80,000 salary, roughly $70,000 escapes the 15.3% charge — around $10,700 of payroll tax, before considering the deductible half.

What it costs.

• Payroll processing, which you now need because you are an employee of your own company.
• A separate business tax return, on top of your personal return.
• State filing fees, franchise taxes in some states, and a registered agent.
• Your own time on the additional administration.

Two to four thousand dollars a year is a common range, which is why the election rarely makes sense below a certain profit level.

What the risks are. The salary must be reasonable compensation for the work you actually perform. This is the most frequently challenged aspect of S-corp taxation, and there is no safe-harbour percentage — the standard is what you would have to pay someone else to do your job. Setting it artificially low to maximise distributions is precisely what draws scrutiny, and reclassification brings back taxes, interest and penalties.

What is easy to overlook. A lower salary reduces the earnings on which your future Social Security benefit is calculated. It can also reduce how much you can contribute to a retirement plan, since contribution limits are tied to compensation. And QBI interacts with the salary decision in ways that are not always intuitive.

An S-corp election is not automatically beneficial. Model it above, then take the numbers to a CPA before filing anything.

What this comparison leaves out

Several of these favour employment, and none of them are trivial:

• State and local income tax, plus state business taxes, franchise taxes and city business licences.
• Unemployment insurance. Employees are covered; independent contractors generally are not.
• Workers' compensation. Same.
• Quarterly estimated tax payments. Contractors must pay tax through the year rather than through withholding, and underpayment carries penalties. It also requires the discipline to set money aside from irregular income.
• Cash flow. Invoices get paid late. A salary does not.
• Retirement plan capacity. This cuts the other way — a solo 401(k) or SEP-IRA can allow a self-employed person to shelter considerably more than a typical employee plan permits.
• Tax credits of any kind.

Common mistakes

Accepting a contract rate equal to a salary. The most expensive mistake in this whole area.

Forgetting quarterly estimated taxes. A large tax bill in April with no money set aside is the classic first-year contractor experience, and the underpayment penalty makes it worse.

Deducting things that are not deductible. The home office deduction requires space used regularly and exclusively for business — a laptop on the kitchen table does not qualify. Commuting is not deductible. Meals have specific rules. Aggressive deductions without documentation are a poor trade against the penalties.

Not tracking expenses at all. The opposite error, and probably more common. Legitimate deductions that go unclaimed are simply money given away, and they reduce self-employment tax as well as income tax.

Electing S-corp status too early. Below a certain profit level the administrative costs exceed the payroll tax saving.

Assuming you can choose your classification. Worker classification is determined by the facts of the relationship — who controls how the work is done, whose tools are used, whether the work is integral to the business. Both parties agreeing on a label does not make it correct, and misclassification has consequences for both sides.

Frequently asked questions