1099 vs W-2 in 2026: A $120,000 Job Takes About $94 an Hour, Not $75
The offer arrives as an hourly number, and the first thing most people do is multiply it by 2,080. That is how a $75-an-hour contract becomes "$156,000" in your head, comfortably above the $120,000 salary you have now, and how the decision gets made before any of the arithmetic happens.
Three things are wrong with that multiplication. You will not bill 2,080 hours. The employer's half of Social Security and Medicare is now yours. And the benefits that never showed on your payslip were worth real money you are about to start paying for yourself.
Everything below is worked arithmetic for a single filer with no other income, using 2026 federal figures. Not tax or legal advice.
Quick answer
Replacing a $120,000 salary that carries $25,000 of benefits takes about $88 to $94 an hour, not $75 — and that assumes you bill every one of 1,960 hours. At $75 an hour you bill $147,000, keep $99,880 after self-employment tax and federal income tax, then hand back roughly $25,000 buying the cover the job included: about $18,000 behind where you started. Bill 1,560 hours instead — what a real year with sales, admin and gaps looks like — and the break-even climbs to $111 to $118.
The offer, run end to end
The comparison uses the defaults in the contractor versus employee engine: a $120,000 salary with $25,000 of employer-paid benefits, against $75 an hour with three weeks unpaid off — 1,960 billable hours — and $15,000 of genuine business expenses.
| 2026, single filer | W-2 at $120,000 | 1099 at $75 an hour |
|---|---|---|
| Paid or billed | $120,000 | $147,000 — 1,960 hours × $75 |
| Business expenses | — | −$15,000 |
| Net profit | — | $132,000 |
| Social Security and Medicare | −$9,180 — your 7.65% half | −$18,651 — 15.3% on 92.35% of profit |
| Half the SE tax, above the line | — | −$9,326 |
| Standard deduction | −$16,100 | −$16,100 |
| QBI deduction | — | −$21,315 |
| Taxable income | $103,900 | $85,260 |
| Federal income tax | −$17,570 | −$13,469 |
| Cash in hand | $93,250 | $99,880 |
| Health cover, retirement match, paid leave | included, worth $25,000 | −$25,000 to replace |
| Comparable position | $93,250 | $74,880 |
The contractor wins on cash and loses the comparison — $18,370 behind — because the last row is the one nobody prices. Some comes back: premiums for your own health cover are deductible above the line, returning your marginal rate on that slice. None of it reduces self-employment tax.
The employer's half is now yours
A W-2 employee pays 6.2% Social Security and 1.45% Medicare. The employer pays the same again, and it never appears on the payslip. A contractor pays both halves as self-employment tax.
The rate is 15.3%, but it applies to 92.35% of net profit rather than all of it, so the real bite is 14.13% of profit. On $132,000 that is $18,651. Two things soften it: the Social Security half stops at $184,500 of net earnings in 2026, and half the total is deductible above the line — the $9,326 row in the table. The Medicare half never stops, and another 0.9% applies above $200,000 single, $250,000 joint. For that figure alone, the self-employment tax calculator handles the 92.35% step and the wage-base cap.
The hours you never bill
The engine's vacation-weeks field does more work than its name suggests, and it is the input that moves the answer most. Three weeks off gives 1,960 hours and assumes every remaining hour is billable — no proposals, no invoicing, no client that ends in March and is replaced in May.
Put your real non-billing time in that field and watch both rates move:
| Hours you actually bill | Cost-recovery rate | After-tax parity rate |
|---|---|---|
| 1,960 — 3 weeks off, everything else billed | $93.81 | $88.48 |
| 1,760 — 8 weeks not billed | $104.47 | $98.54 |
| 1,560 — 13 weeks not billed | $117.86 | $111.17 |
Four hundred hours you do not bill — ten working weeks — is worth $24.05 an hour on the cost-recovery line and $22.69 on parity. That is a larger swing than any tax provision on this page, and it is the input people guess at instead of counting.
What pushes back the other way
Three things genuinely favour the 1099 side, and none of them closes the gap between $75 and $94 on its own.
Expenses come off before both taxes. The $15,000 in the table reduces income tax and the self-employment tax base, so $15,000 of real business spending costs about $10,400 after tax — roughly 70 cents on the dollar. That holds only for spending you would do anyway; buying things for the deduction still leaves you 70 cents down.
The QBI deduction. Section 199A gives 20% of qualified business income, and OBBBA made it permanent. Below $201,750 of taxable income single, $403,500 joint, the wage and property tests do not apply. Here 20% of $122,675 would be $24,535, but the deduction is capped at 20% of taxable income before it — the $21,315 row. A salary gets nothing comparable.
A solo 401(k). You lose the match and gain the ceiling: the same $24,500 elective deferral any 401(k) allows in 2026, plus an employer contribution from the business, up to $72,000 of total additions. Catch-up adds $8,000 from 50, $11,250 between 60 and 63.
One thing that is not an argument: rates reverting after 2025. OBBBA made the 10/12/22/24/32/35/37 brackets permanent. For a single filer in 2026 the 22% band runs from $50,400 to $105,700 of taxable income, which is where both the W-2 and the 1099 columns of the comparison above land — $103,900 and $85,260.
The break-even rate
Two ways of asking, and the engine reports both because they are not the same question. The cost-recovery rate is what your billing has to cover: the salary, the benefits, the business expenses and the self-employment tax that the rate itself generates. At 1,960 hours it is $93.81. That last clause is why it has to be solved rather than calculated once — the tax depends on the answer — so the engine iterates to the rate that is consistent with its own tax bill. Type $93.81 back into the rate box and it does not move.
The after-tax parity rate asks the narrower question: what rate leaves the same spendable cash once you have bought the same cover yourself. That is $88.48. Parity sits lower because cost recovery hands you the full $145,000 free of payroll tax, and the employee never had $145,000 in hand — $9,180 of it went to FICA and $17,570 to the IRS before they saw any of it. Treat parity as the floor and cost recovery as the opening ask.
So: high-$80s to mid-$90s at 1,960 hours, $111 to $118 at 1,560. A $75 offer is not in that band on any reading, and neither is the "1099 pays 1.3× salary" rule of thumb — $156,000, or $79.59 an hour. Put your own salary, benefits value and billable hours in and get the rate you should be asking for before the next conversation, not after.
The part you do not get to choose
Whether you are an employee or a contractor is a legal test applied to the facts, not a label the two sides agree on. The IRS looks at behavioural control, financial control and the type of relationship; either party can ask for a written determination on Form SS-8. The Department of Labor applies its own "economic reality" test under the Fair Labor Standards Act for minimum wage and overtime, and several states are stricter than either.
Getting it wrong has consequences, mostly for the business: back employment taxes, penalties and interest, and back wages where overtime rules applied. A worker who believes they were misclassified reports the uncollected Social Security and Medicare on Form 8919 rather than paying full self-employment tax on Schedule SE. Same desk, same hours, same supervision, new paperwork is the arrangement that draws attention. If that describes your offer, take it to an employment lawyer or a CPA before signing.
FAQ
The recruiter says 1099 pays 1.3× the salary. Is that enough?
Usually not. On a $120,000 salary that is $156,000 — $79.59 an hour across 1,960 billable hours, $100 across 1,560 — against cost-recovery rates of $93.81 and $117.86, and after-tax parity rates of $88.48 and $111.17. It clears nothing at either hour count. The multiple only works if your benefits package was thin and your billable hours are genuinely high. Multiply the rule of thumb out into an hourly figure before accepting it: 1.3× a salary and 1.3× an hourly rate are not the same trade.
Do I owe self-employment tax on everything I bill?
No. It applies to net profit after business expenses, and then to 92.35% of that — 15.3% × 92.35% is 14.13% of profit. In 2026 the 12.4% Social Security portion stops once net earnings reach $184,500; the 2.9% Medicare portion never stops, and an extra 0.9% applies above $200,000 single or $250,000 joint. Half of what you pay is deductible above the line.
I already signed at a rate that is too low. What now?
Four moves that do not need the client's agreement. Pay quarterly on Form 1040-ES — 15 April, 15 June and 15 September 2026, then 15 January 2027 — because nothing is being withheld for you. Open a solo 401(k) and use the $24,500 deferral plus the employer contribution toward the $72,000 ceiling. Track expenses properly, since each dollar of genuine business spending costs about 70 cents. Claim the QBI deduction on the return; the client does not grant it. Then reprice at renewal with the break-even in hand.
Does any of this change if I set up an LLC or an S corporation?
An LLC by itself changes nothing here — a single-member LLC is taxed as a sole proprietorship, with the same Schedule C, self-employment tax and QBI treatment. An S corporation election changes the payroll arithmetic: you pay yourself reasonable compensation as W-2 wages subject to FICA, and the remaining profit escapes self-employment tax, at the cost of running payroll, filing Form 1120-S and defending what "reasonable" means. Take that decision with a CPA once the rate is settled. It is not a reason to accept a rate that does not clear break-even.
Sources
- IRS Rev. Proc. 2025-32 — 2026 standard deduction ($16,100 single, $32,200 joint) and the ordinary brackets used above
- IRS Notice 2025-67 — 2026 retirement limits: $24,500 deferral, $8,000 catch-up at 50, $11,250 at 60–63, $72,000 of total additions
- Social Security Administration — the 2026 contribution and benefit base of $184,500
- IRS Schedule SE and its instructions — the 92.35% net-earnings factor and the deduction for half the self-employment tax; Form 1040-ES for the quarterly due dates
- Internal Revenue Code §199A and the One Big Beautiful Bill Act (2025), which made the 20% qualified business income deduction permanent, set the 2026 thresholds at $201,750 single and $403,500 joint, and made the 10/12/22/24/32/35/37 brackets permanent
- IRS Form SS-8 (worker status determination) and Form 8919 (uncollected Social Security and Medicare on wages); the US Department of Labor's economic reality test under the Fair Labor Standards Act
General information about how the two arrangements are taxed, not tax, legal or investment advice. Classification depends on the facts of your engagement and on state law as well as federal, and every figure above is worked arithmetic for one hypothetical single filer rather than a statement about your own return.