So “contractor” (aka 1099) jobs pop up here periodically. Unscrupulous employers and agencies will often lure you in with a few bucks more as a 1099, which for the unwary is a trap.
so forthwith a guide to not getting fucked over on a 1099.
For the sake of argument and round numbers, let’s assume a regular job (w2) position pays $50,000 per year. That comes out to $24.03 an hour as a wage earning position. That will also typically come with 2 weeks of paid vacation vacation and 5 sick days a year for which you get paid too, employer sponsored health and disability insurance, 401k matching (typically as much as 6% of your income) and other benefits. Some will contribute tax free dollars to an HSA too.
As a contractor you get none of those benefits. You also have to pay the full payroll takes (about 7% more of your gross income.)So first thing, you need to assume you will only work 1960 hours, to account for your sick and vacation time. A health insurance policy for a single person will run around $500/month, and figuring that 401k matching you are missing out on as a 1099’er.
So what’s it going to take to get you to a similar place as that 24.03 per hour.
But since you are only going to get paid for 1960 hours, that becomes 25.51. Now figure on that lots 401k match, that. An additional. $1.53. Figure 500 a month for your insurance and that;s another $3.06. and then you have self-employment tax, and you are going to pay self-employment tax on all your benefits (that’s about 15%) AND you will be paying income tax on what are to W2 employees tax free benefits, The marginal tax rate at $40to 90k per year of taxable income is 22%. It;s a bit high as I assumed the full cost of health insurance was employer paid and that is truly a pipe dream today. But we also didn't add in a lot of other benefits like life and disability insurance. And we are only using the single person coverage cost, if you are covering your spouse and /or kids a family it's more expensive.
So what does this look like:
| Hourly | Added Cost/Hr | |
|---|---|---|
| Base for 1960 hours | 25.51 | |
| Self Employment Tax | 27.30 | 1.79 |
| Health Insurance | 30.36 | 3.06 |
| 401k Match | 31.89 | 1.53 |
| Additional Self Employment Tax on benefits | 32.84 | 0.96 |
| Income Tax on additional expenses | 34.46 | 1.61 |
TLDR: to be the equivalent of a 24.03/hour W2 job as a 1099 contractor you should be making at LEAST $34.46
Don't let them fuck you.