Contractor vs employee pay looks simple until you run the numbers: a $65/hour contract sounds like a fortune next to a $100,000 salary — until self-employment tax, health insurance, and unpaid time off take their cut. A contractor vs employee pay calculator shows the truth: at $65/hour, the contractor roughly ties the employee’s total package. Below $60/hour the employee wins; above $70/hour the contractor pulls ahead. Test your own rate in NovaFluxT’s free salary paycheck calculator while you read.
The three things employees forget to price: self-employment tax (15.3% on net earnings vs 7.65% as an employee — you pay both halves), benefits (health insurance, 401(k) match, paid time off), and bench time (contractors don’t get paid for vacations, holidays, or gaps between gigs).
Below, we price out a $100,000 employee’s full package, run a contractor’s books at three hourly rates ($60, $65, $70), and give you the 1.3× rule of thumb for setting your own rate. See the IRS’s worker-classification rules. See the SSA’s FICA tax rates.
Worked example: $100,000 employee vs contractor rates
Assumptions (labeled): single filer, 2026 brackets, $16,100 federal standard deduction, contractor works 2,000 billable hours/year (2 unpaid weeks off), pays $6,000/year for own health insurance, no state income tax.
The employee: $100,000 salary
- Federal income tax: $13,170 (bracket slices on $83,900 taxable — see our 2026 tax brackets guide)
- FICA (7.65%): $7,650
- Take-home: $79,180
- Plus employer-paid value: health insurance ~$7,000, 401(k) match (3%) ~$3,000, 15+ paid days off
- Total package value: ≈ $89,180 (before counting PTO)
The contractor at $65/hour ($130,000 gross)
- Self-employment tax: $130,000 × 92.35% × 15.3% = $18,368
- Taxable income: $130,000 − $9,184 (half of SE tax, deductible) − $16,100 = $104,716
- Federal income tax: $1,240 + $4,560 + 22% × $54,316 = $17,749
- After-tax: $130,000 − $18,368 − $17,749 = $93,883
- Minus own health insurance: $93,883 − $6,000 = $87,882 spendable — no PTO, no match
Verdict at $65/hr: rough parity with the employee’s ~$89,180 package.
The break-even map
| Contractor rate | Gross (2,000 hrs) | Spendable after tax + insurance | vs employee package |
|---|---|---|---|
| $60/hr | $120,000 | $81,340 | Employee wins by ~$7,800 |
| $65/hr | $130,000 | $87,882 | Rough tie |
| $70/hr | $140,000 | $94,425 | Contractor wins by ~$5,200 |
Rule of thumb: a contractor needs roughly 1.3–1.4× the employee’s hourly rate to break even. A $100,000 salary is $48.08/hour — so the break-even contract rate lands around $62–$67/hour, exactly what the math above shows.
Frequently asked questions
What is self-employment tax and how much is it?
Self-employment tax is Social Security (12.4%) plus Medicare (2.9%) — 15.3% total — on 92.35% of your net self-employment earnings. Employees pay only half (7.65%) because employers cover the rest; contractors pay both halves. Half of what you pay is deductible from income tax, which softens the blow slightly.
Do contractors get paid time off?
No — and this is the most underpriced item in the comparison. An employee’s 15 vacation days + 10 holidays are ~10% of the work year, paid. A contractor billing $65/hour who takes the same 25 days off forfeits $13,000 in billings. Our worked example assumes 2,000 billable hours (not 2,080) for exactly this reason.
Should a contractor form an LLC or S-corp to pay less tax?
An LLC alone doesn’t change your federal tax bill — it’s still pass-through. An S-corp election can reduce self-employment tax by letting you take part of income as distributions, but it adds payroll costs, filings, and complexity that only pay off above roughly $60,000–$80,000 in profit. This is general information, not tax advice — talk to a CPA before electing.
How do benefits factor into the employee vs contractor comparison?
Add up the employer’s premium contributions (often $6,000–$8,000/year for health insurance), the 401(k) match, and the dollar value of PTO days — then add that total to the employee’s take-home before comparing. In our example, benefits closed most of a $30,000 gross-pay gap. Never compare gross salary to gross contract rate directly.
What hourly rate should I charge as a contractor?
Start from the employee salary you’d accept, divide by 2,080 for the hourly equivalent, then multiply by 1.3–1.4 to cover self-employment tax, insurance, unpaid time off, and business costs. A $100,000 salary translates to roughly $62–$67/hour minimum — charge more if your skills are scarce or gigs are inconsistent.
Related tools and guides
- Salary Paycheck Calculator — model employee vs contractor pay
- Income Tax Estimator — federal tax on any income level
- $25 an Hour After Taxes — the same take-home math at $25/hr
- Take-Home Pay: California vs Texas — state tax changes both sides