How to Use This Tool
Enter the salary you are comparing against and what the benefits were worth. The output is the hourly rate at which contracting leaves you in the same position.
The employer half you never saw
An employee pays 7.65% of wages in Social Security and Medicare. The employer pays another 7.65% that never appears on a payslip and is never mentioned in a salary negotiation.
A contractor pays both halves through self-employment tax. That is 15.3% of net earnings, and because the tax applies to 92.35% of profit rather than all of it, the real figure is 14.13% of profit. Half of it is then deductible against income tax, which softens it further.
So the payroll tax difference is real and it is smaller than the raw 7.65% doubling suggests. It is also only the first of three things.
Paid time stops being paid
The conventional 2,080 hours a year — 40 × 52 — counts paid leave and public holidays as working time, because for an employee they are. An employee with 15 days of leave and 10 public holidays is paid for 2,080 hours and actually works about 1,880.
A contractor bills only hours worked. Matching the same annual income over 200 fewer hours requires a 10.6% higher rate before anything else is counted. Add unbillable time — quoting, invoicing, chasing payment, admin, finding the next contract — and the billable total falls further. Fifteen per cent is optimistic; a quarter is common.
Benefits were part of the pay
Health cover, retirement matching, disability and life insurance, equipment, software, training and paid sick leave were all provided on top of salary. Replacing them is a cost, and health cover on an individual market is frequently more expensive than the employer's group rate for the same coverage.
Whether to count the full replacement cost depends on your circumstances — someone covered by a spouse's plan has a very different number here — which is why every component is editable rather than assumed.
The offset nobody mentions: QBI
The qualified business income deduction can remove up to 20% of qualified business income from taxable income. It applies to self-employment income and not to wages, so it is a genuine advantage of contracting that a naive comparison misses.
At a 22% marginal rate on $120,000 of qualified profit, a 20% deduction is worth roughly $5,280 of income tax. It does not reduce self-employment tax, only income tax.
It is also not automatic. Limits phase in above $201,775 of income for a single filer for 2026, and specified service businesses — consulting, law, accounting, health and others — can lose it entirely above the phase-in range. Whether it applies to you is genuinely a question for an accountant.
What this cannot price
- Income stability. A gap between contracts has no equivalent on a salary.
- Unemployment insurance, which self-employment generally does not qualify for.
- Legal and administrative cost of an entity, accounting and compliance.
- Control and flexibility, which are usually the actual reason people do it and are worth different amounts to different people.
Figures are for tax year 2026. This is arithmetic for comparison, not tax advice.