What salary actually matches your contract rate?
The usual advice is to knock 25–30% off a contract rate to get the equivalent salary. That is wrong, and it is wrong by enough to cost you a job you should have taken, or talk you into one you should not have. This works it out properly — in either direction.
Example: $85/hour, 40 hours, 48 weeks
With $6,000 of expenses, $9,600 of health cover, and a 4% match given up.
The form for your own figures loads with JavaScript. The results are worked out for this example.
A salary of about $138,025 matches $85/hour
Billing 40 hours a week for 48 weeks brings in $163,200. After self-employment tax, income tax and paying for your own health cover, an employer would have to offer about $138,025 — $66 an hour over a 2,080-hour year — to leave you in the same position.
Where the money goes
| Contracting (1099) | Employed (W-2) | |
|---|---|---|
| Gross for the year | $163,200 | $138,025 |
| Business expenses | -$6,000 | — |
| Payroll taxA contractor pays both halves; an employee pays one. | -$22,212 | -$10,375 |
| QBI deduction claimed20% of business income. Wages do not qualify, which is the single biggest asymmetry here. | $24,079 | — |
| Federal income tax | -$15,901 | -$21,284 |
| Health insurance you payAn employee's share comes out pre-tax, so it also cuts their payroll tax. | -$9,600 | -$2,400 |
| Employer retirement matchReal compensation, but not cash you can spend this year. | — | $5,521 |
| What you actually keep | $109,487 | $109,487 |
What this does not price in
- Risk. Equivalent here means equal after-tax money in one year. It does not mean equal security. A contract can end with 30 days’ notice; the equivalent salary does not include a premium for that, and most people should ask for one.
- 4 unbilled weeks are already in these figures. If you bill all 52, raise the weeks above and the equivalent salary rises with it.
- Federal tax only. State income tax, and state-level business taxes, are not included.
- Retirement contributions. A solo 401(k) lets a contractor shelter considerably more than an employee’s plan allows, which can favour contracting if you save aggressively. Not modelled here.
Method and sources are on the methodology page. Estimates for planning, not tax advice — see the disclaimer.
Why the 30% rule of thumb is wrong
It comes from one true fact — a contractor pays both halves of payroll tax — and then ignores everything pulling the other way. Four things move the answer, and they do not all move in the same direction.
Against contracting
- Both halves of payroll tax. Self-employment tax is 15.3% on 92.35% of profit. An employee pays 7.65% and the employer pays the rest.
- The whole health premium, not an employee’s share of it.
- No employer match. A 4% match on a $120,000 salary is $4,800 a year you simply do not get.
- Unpaid time off. Bill 48 weeks instead of 52 and that is four weeks of income an employee is paid for anyway.
For contracting
- The QBI deduction. 20% of business income comes off your taxable income. Wages do not qualify for it at all. This is the big one, and it is the one most comparisons leave out entirely.
- Health premiums are deductible above the line for the self-employed, reducing income tax — though not self-employment tax.
- Business expenses are deductible. An employee generally cannot deduct unreimbursed work costs at all.
Net it out and the equivalent salary often lands within about 10% of the contract revenue rather than 30% below it. Whether it lands above or below depends mostly on the health premium and the match, which is why those are inputs rather than assumptions.
What “equivalent” does not mean
It means the same after-tax money over one year. It does not mean the same risk. A contract can end on thirty days’ notice, and no employer pays you for the gap before the next one. If contracting is going to leave you genuinely even, most people should want a premium on top of the equivalent figure, not the equivalent figure itself.
It also does not price retirement. A solo 401(k) lets a self-employed person shelter far more than a typical employee plan allows, which pushes the other way if you save hard.
How to use the result
If you have a rate and are weighing a job offer, use the first direction and compare the equivalent salary against the offer. If you have an offer and are considering going independent, use the second: it tells you the hourly rate that makes leaving break even, over the hours you realistically expect to bill.
The full method, and what it leaves out, is on the methodology page. These are planning estimates, not tax advice — see the disclaimer.