Other 1099 vs. W-2 considerations
When breaking down the differences between 1099 and W-2, there are other considerations to keep in mind, such as hourly rates, salaries, and benefits. Learn more about these calculations below.
How to calculate the hourly rate differences between W-2 and 1099 workers
You may pay contractors a set amount, either hourly or by the project. Many contractors will outline their payment terms and rates in their contracts. 1099 contractors who get paid hourly may ask for a higher hourly rate than you pay your regular employees. 1099 contractors pay their own taxes and supply their own benefits, so they may need to charge more per hour to cover those costs.
Employment taxes (like Social Security taxes and Medicare taxes) amount to 15.3% of a worker’s gross wages. Employers pay half of this (7.65%) and withhold the other half from W-2 employee paychecks.
1099 contractors pay the full 15.3% themselves from the money they earn. They also need to file quarterly estimated tax payments and pay quarterly estimated federal and state taxes.
With this in mind, 1099 contractors need to make a minimum of 7.65% more per hour to cover the employer's share of Social Security and Medicare taxes.
How to calculate the salaries and benefit rates of W-2 and 1099 workers
Contractors don’t always get the added benefits of health insurance, paid time off, and other employer-paid benefits that W-2 employees do. 1099 workers have to provide these benefits themselves. As a rule of thumb, benefits are worth about 30% of a worker’s total compensation package, according to the U.S. Bureau of Labor Statistics.
A March 2020 report found that employer costs for employee compensation for civilian workers averaged $37.73 per hour they worked. Wages and salaries cost employers $25.91 while benefit costs were $11.82. These benefits include:
- Paid leave
- Health insurance
- Retirement savings
Note: A 1099 contractor needs to make a minimum of 30% more than W-2 employees to match employee compensation, including benefits.