$75/hr Contracting vs. $75/hr Salaried: Why They're Not the Same Money

A recruiter offers you $75/hour on a 1099 contract, or $75/hour as a salaried W-2 employee at the same company. Same number, so it’s a wash, right? It isn’t — and the gap is bigger than most people guess. The contract rate has to cover things an employer normally pays for quietly in the background: half of your payroll tax, your health insurance, a chunk of retirement savings, and every week you’re not actively billing. Strip those out and a $75/hr contract rate often lands closer to a $55–58/hr salaried equivalent. This is the exact comparison the 1099 Contractor Rate vs. W-2 Salary Converter runs for you, but it’s worth walking through by hand once so the number stops feeling arbitrary.

The self-employment tax gap

Every paycheck, Social Security and Medicare (FICA) get funded by two halves: 7.65% comes out of the employee’s paycheck, and a matching 7.65% is paid separately by the employer, invisibly, on top of the salary. As a W-2 employee, you never see that second half — it’s simply part of the cost of employing you, not part of your gross pay.

As a 1099 contractor, there is no separate employer. You are the employer, so you owe both halves — the standard 7.65% you’d expect, plus the 7.65% an employer would otherwise absorb. That extra 7.65%, sitting on top of your entire contract income, is money a salaried offer at the same headline rate simply doesn’t require you to pay. It’s the single biggest hidden gap between the two numbers, and it applies to every dollar of contract revenue, not just the top tax bracket.

Health insurance stops being someone else’s line item

At most W-2 jobs, the employer pays a large share of your health insurance premium directly — often 70-80% of it — and it never touches your paycheck at all. As a contractor, you’re buying that same coverage yourself, in full, out of after-tax contract income. A mid-tier family or individual plan can easily run $400-$700 a month. That’s $4,800-$8,400 a year that a salaried offer effectively adds on top of the number in the offer letter, and a contract rate has to cover on its own.

The retirement match you never see

Many W-2 employers match a percentage of salary into a 401(k) — commonly 3-6% — as free money layered on top of pay. A 1099 contractor has no employer to match anything; whatever you set aside for retirement, including the employer-side portion, comes entirely from your own pocket. A 4% match on a $126,000 gross looks small as a single line item, but compounded over a career it’s a meaningful piece of total compensation that a contract rate needs to replace.

Paid time off, and the unpaid time in between

W-2 salaries are paid every week of the year, including holidays, vacation, and sick days — commonly adding up to 10-20 paid days annually that you’re compensated for without billing a client. Contractors don’t get paid holidays: if you don’t bill, you don’t earn. Worse, contract work also comes with unpaid gaps between engagements — the weeks spent finding the next contract, or waiting on a start date — that a full-time salary doesn’t have. A contractor who only bills 46-48 weeks a year, versus 52 paid weeks for an employee, is already absorbing an unpaid gap before health insurance or taxes are even considered.

Where the “1.25-1.5x” rule of thumb comes from

Freelancers often hear a rough rule: take the salary you’d want as an employee and multiply it by somewhere between 1.25 and 1.5 to land on an equivalent contract rate. That range isn’t arbitrary — it’s the sum of the gaps above, stacked on top of each other:

• ~8% for the extra employer-side self-employment tax
• ~8-12% for fully self-funded health insurance
• ~3-6% for the forfeited retirement match
• ~5-10% for unpaid time off and gaps between contracts

Add those up and you land squarely in the 25-40% range — which is exactly why multiplying a target salary by 1.25 to 1.5 gets you into the right neighborhood for a contract rate that actually compares. The precise multiplier for your situation depends on how generous the benefits package you’re comparing against actually is, and how many billable weeks you realistically expect in a year.

A worked example

Take a contractor billing $75/hour, 35 billable hours a week, for 48 weeks a year (accounting for time between contracts). That’s an annual 1099 gross of $126,000.

• Extra self-employment tax (7.65% of gross): −$9,639
• Self-funded health insurance ($500/month): −$6,000
• Forfeited 4% retirement match: −$5,040
• Equivalent W-2 salary: roughly $105,300

That’s an effective W-2 hourly rate of about $57.90, once the annual figure is spread over 35 hours a week across all 52 paid weeks — noticeably less than the $75/hr headline number, even before counting the roughly $9,000 worth of paid holidays and PTO a salaried offer would also throw in on top.

Run your own numbers

Every one of these gaps scales differently depending on your rate, your hours, and the benefits on the table, so a rule of thumb only gets you in the ballpark. Plug your own hourly rate, billable hours, weeks worked, health insurance cost, retirement match, and PTO days into the 1099 Contractor Rate vs. W-2 Salary Converter to get the actual equivalent salary and hourly rate for your situation. If you bill by the day rather than the hour, the Day Rate to Annual Salary Calculator runs the same kind of comparison from a day-rate starting point.

This article and the linked calculator are general information to help you compare offers — they are not tax or financial advice. Actual tax liability depends on your filing status, state of residence, itemized versus standard deductions, and eligibility for the Qualified Business Income (QBI) deduction, among other factors. Talk to a qualified tax professional or CPA before making decisions based on these numbers.