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W-2 vs 1099 cost
calculator (US)

Compare the real employer cost of an employee against a contractor at the same headline rate.

Your numbers

Health and retirement, per BLS ECEC March 2026
Employee vs contractor gap
 
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Is a 1099 contractor cheaper than a W-2 employee?

On direct cost, yes. The employer pays no FICA, no unemployment tax and no benefits on a contractor, which typically makes an employee 20 to 28% more expensive at the same headline rate. Classification is a legal test, though, not a cost decision.

How we calculated this

For the W-2 employee we add the employer payroll taxes and benefits to the pay: Social Security at 6.2% up to the $184,500 wage base, Medicare at 1.45%, FUTA at an effective 0.6% on the first $7,000, state unemployment at your rate and wage base, and benefits at the percentage you entered. For the 1099 contractor the cost is the contract value alone, because the employer pays none of those. The gap is the difference, shown in dollars and as a share of pay. It is the cost side of a decision the law makes on the facts. The working and the sources are set out below.

New to the term? Read the plain-English definition of W-2 vs 1099 classification in the HR Glossary.

Your working
Assumptions
  • Compares the two at the same headline rate. In practice contractors often charge more per hour to cover their own self-employment tax, insurance, equipment and downtime, so the real gap is usually smaller than shown, and sometimes reversed.
  • Uses calendar 2026 federal figures (the $184,500 wage base, FUTA at 0.6% after the state credit) and your entered state unemployment rate and base. Benefits default to 15% of salary, the BLS health and retirement share; your plan costs set the real figure.
  • Puts no dollar value on the contractor-side costs of the arrangement: onboarding time, management time, knowledge that leaves at the end of the engagement, and the risk of reclassification. Nor does it price back taxes, penalties, interest or wage-and-hour liability if the classification is wrong.
  • Assumes the classification is lawful. The IRS common-law test (behavioural control, financial control, type of relationship) decides the tax outcome; the Department of Labor's FLSA test is being rewritten as at 2026; several states, notably California, apply a stricter ABC test. The label on the invoice decides none of them.
Sources

What to do about it

The gap above is the easy half of the decision and the half that gets people into trouble, because it makes the contractor look like a saving. Classification is a legal test. These steps are for whoever is proposing the engagement, whether that is a hiring manager or finance.

1

Run the facts before you run the numbers

Who controls how and where the work is done, who bears the financial risk, is the relationship open-ended, is the work core to the business? Write the answers down against the IRS factors and, if the state applies an ABC test, that one too. If it reads like employment, stop here.

2

Compare like with like

Ask what a contractor would actually charge for the role, not the employee's salary at the same number, and add the management time and handover cost of an engagement that ends. The gap usually shrinks. Put both versions in the proposal.

3

Decide which roles you want on payroll and why

Work that carries your culture, your customer relationships, your know-how or your capability for the next few years belongs with people you are developing and keeping. Flexible, bounded, specialist work can suit a contractor. Make that call role by role and record it; "cheaper" is not a reason that survives an audit.

4
Where a tool helps

When it is an employee, hire for the full loaded cost

If the answer is W-2, the premium above only pays off if the person is right for the team and stays. Define what a good hire looks like at twelve months and select for it the same way for every candidate.

5

Review contractor engagements every twelve months

Relationships drift toward employment: hours settle, the work becomes core, the tools become yours, the contractor stops working for anyone else. A yearly check with the same questions as step 1 catches the drift before an agency does.

The gap is a cost.
The hire is a decision.

Compono Hire is an applicant tracking system (ATS) that measures fit before you make the offer. It runs the process (job posting, pipeline, interview scheduling, offers) and adds what most ATSs skip: a validated work personality and culture fit read on every candidate, scored the same way every time and shown next to the skills screen.

Step 4 is where the W-2 premium either pays off or does not. Hire measures every candidate against the fit you defined, so the extra cost above buys someone who stays and performs, and the payroll decision you defended on the facts is also the right one on the people.

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Common questions

What taxes does an employer pay on a 1099 contractor?

Generally none. The IRS states that you do not have to withhold or pay taxes on payments to independent contractors. The contractor handles their own self-employment tax.

How is worker classification decided?

On the facts. The IRS common-law test weighs behavioural control, financial control and the type of relationship, and governs the tax outcome. The Department of Labor's separate FLSA test is being rewritten as at July 2026, and some states, notably California, apply a stricter ABC test.

What happens if we misclassify someone?

Back taxes, penalties and interest, plus potential wage and hour liability. The saving disappears fast. If the relationship looks like employment on the facts, the label on the invoice will not protect you.

This page is general information, not legal advice. We check figures annually and update them on a best-efforts basis, but employment rules change and we cannot promise everything here is current or complete. Before you act on it, confirm the detail with the US Department of Labor or your own adviser. Last reviewed July 2026.

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W-2 vs 1099 classification

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