I've been a full-time employee for a while and just started contracting work end of last year as W2. With the advent of ACA, I just realized that I can get more benefit from the heathcare exchanges than the vendor company offered plans. I intend to go with a plan from the exchange.

However, I just realized that there is not much other benefit being a W2 employee. The employer wouldn't contribute to my health benefits, wouldn't contribute to my 401k and I sincerely doubt that they would "keep me on the bench" if the situation occurs.

So for some people that already are truly independent, am I missing anything? If my assumptions are correct, what rate should I be asking since I just relieved the company of many responsibilities?

  • You might want to mention where you are. None of those references (W2, 1099, ACA, 401K) mean anything to anyone unless they are familiar with your tax system. Having looked at your profile I'm guessing USA?
    – Styphon
    Apr 27, 2014 at 18:11
  • 1
    As a 1099 contractor, you would be responsible for both halves of SS and Medicare taxes. Apr 27, 2014 at 18:48
  • As a non-american this question is impossible to understand, please edit and add a US tag to it.
    – Fredrik
    Apr 28, 2014 at 7:33
  • For what it's worth, also consider Sumaritan and other cost sharing plans. Aug 20, 2019 at 19:07

4 Answers 4


This is obviously USA.

The employment taxes (social security and medicare) amount to 15.3% of your gross wages. When you're a W2 employee, your employer pays half of this and withholds the other half from your paycheck.

When you're independent (1099) you're expected to pay the whole amount yourself, from the money you earn. You need to file a quarterly estimated tax payment to do this. You'll also need to pay quarterly estimates for your federal and state tax (in the same payments) because nobody's withholding that money from your paycheck.

Employers also pay such things as federal and state unemployment insurance premiums and workers' compensation premiums. If you're independent you won't have those things: you won't be eligible for unemployment benefits. You're self-employed. If you do hazardous work you might consider getting your own hazard insurance.

Those things are why independent (1099) contractor hourly rates are typically higher than employee rates. You should definitely earn a bare minimum of 7.65% more per hour for the same work when you're a 1099 contractor -- that's you're share of social security / medicare. You should ask for 12% or so -- e.g. about $34 per hour rather than $30, or about $67 rather than $60. That covers your taxes; again it's a bare minimum.

Compare contracting rates to W-2 job with good health insurance, vacation, sick leave, and other benefits. The value of all that good stuff is probably 25% - 30% of your pay. So if you want the same total package, you had best add at least 25% to your W-2 base pay.

The good news: You're a small business. You can file a Schedule C (sole proprietorship business) with your income tax return. On Sched C you can write off lots of costs: marketing, some equipment, licenses, telecommunications, some travel, etc. You can also give yourself a Simplified Employee Pension Plan (IRA-SEPP), into which you deposit tax-deferred money for retirement.

You can also write off the costs of a home office, but be careful: the tax authorities like to audit those claims. I've never thought it was worth the trouble.

If you're a 1099 contractor, it's a good idea to get in the habit of submitting regular invoices to your customer (your employer). Find out who actually pays those invoices in your customer organization. Ask that person to check over your first invoice, and make sure everything they need to expedite payment is on there. Find out how often they write payment checks (e.g. every other Thursday, or on the 11th and 24th of each month, or whatever), and how far in advance you should submit the invoice so it can get approved and paid.

All in all the 1099 route is an excellent way to go if you're disciplined enough to save the money you need to file your quarterly estimated tax payments.

  • "You should ask for 12% or so -- e.g. $36 per hour rather than $30, or $75 rather than $60." Isn't your example 20% and 25% respectively, rather than 12%? Sep 11, 2015 at 5:19
  • I'm also confused about that. Can you please clarify?
    – 626
    Jul 25, 2019 at 22:58

I am not a lawyer, but you should spend a bit of money on one.

First, many SE people incorporate as an "S Corporation." As a contractor, all your personal assets are at risk from any legal actions against you. Also, a good tax attorney will help you set up an S Corporation and save you quite a bit of money on taxes.

Again, not a lawyer, and the only legal advice I am giving is you should talk to one.


There are a lot of things that go into calculating the benefits of one versus the other. I found a good site that lets you play around with the numbers.

From the site:

The calculator below will help you compare the most relevant parts of W2 vs 1099 by looking at how the two options affect your income and tax situation, but it's important to note that this is not an exact calculation of your taxes because many other factors outside the scope of this comparison can affect your tax situation. The numbers are relevant only in relation to each other as a comparison tool.

This online calculator might help you compare the income with each option, taking into account the differences in taxes. It's not exact (as it says) but it should help you decide which is most suitable for you:



You have to pay employee and employer side of the taxes if you are 1099, you may not get holiday or vacation pay ( depends on your agreement. We only pay for hours worked)' you can't collect unemployment if 1099 - can on w2( because you are not an employee). The upside is that you can write off more things on your taxes ( if you plan things right), your healthcare costs are sometimes tax deductible (mine are and I own a staffing firm). There are positives and negatives to both sides.

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