Contractor vs employee cost
Enter the base pay you would offer. We estimate the employer’s true annual cost each way.
The calculator above shows the fully-loaded cost each way. But cost is only half the decision — classification is a legal test, not a preference.
Why a W-2 employee costs more
A W-2 hire carries costs a contractor's rate does not:
- Employer-side FICA of 7.65% (Social Security and Medicare)
- Federal and state unemployment taxes
- Benefits, equipment, software, and management time
A contractor covers their own self-employment tax and overhead, so the headline cost is lower — but you also have less control over how the work is done.
The IRS classification test
Whether a worker is a contractor or employee is decided by control, not by the contract or the worker's preference. The IRS weighs:
- Behavioral control — who decides when, where, and how the work is done
- Financial control — who controls the business side of the work
- Relationship — permanency, benefits, and how integral the role is
What misclassification actually costs
Treating a true employee as a 1099 contractor can trigger back payroll taxes, penalties, and interest — sometimes years' worth — plus state exposure and liability for benefits and overtime.
When the line is unclear, a short review now is far cheaper than a reclassification assessment later.
Related tools & guides
Keep going: Self-employment tax calculator · Bookkeeping service · CPA vs EA vs preparer.
Frequently asked questions
Why does a W-2 employee cost more than a 1099 contractor?
On a W-2 employee the employer pays half of Social Security and Medicare (7.65%), unemployment taxes, plus benefits, equipment, and software — none of which apply to a contractor's headline rate.
Can I just pay someone as a 1099 to save money?
Only if they genuinely meet the contractor test. Misclassifying a true employee as a contractor risks back taxes, penalties, and interest.
How does the IRS decide contractor vs employee?
It weighs behavioral control, financial control, and the relationship — essentially how much control you have over how the work is done.
What taxes does an employer pay on a W-2 employee?
Employer-side FICA of 7.65% (Social Security and Medicare), federal and state unemployment taxes, and any benefits or insurance you provide.
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