Is a 1099 contractor cheaper than a W-2 employee?

Usually on paper, because you avoid the 7.65% employer FICA, FUTA, state unemployment insurance, benefits, and workers' comp. In the example below, a $75,000 employee in Texas costs $99,323 fully loaded. But a contractor who does the same work often charges more per hour to cover their own taxes and lack of benefits, which narrows the gap.

What is the breakeven contract rate?

It is the 1099 rate at which a contractor costs the same as the W-2 hire. For the $75,000 Texas example, the W-2 costs $99,323 all in, so any contract above $99,323 per year makes the contractor the more expensive option.

When should I hire a W-2 employee instead of a 1099?

Choose a W-2 when the work is core to your business, ongoing, and needs your direction and tools. That is also the legally safe choice — work central to the business usually fails the ABC test for contractors. A 1099 fits specialized, project-based, or short-term work the person performs independently.

What payroll taxes does an employer pay on a W-2 in 2026?

Employers owe 6.2% Social Security on the first $176,100 of wages, 1.45% Medicare on all wages, 0.6% FUTA on the first $7,000, plus each state's unemployment insurance. Use the calculator to apply your state's exact rate.

Decision guide · 2026

W-2 vs 1099: what each hire really costs

The choice between a W-2 employee and a 1099 contractor is usually framed as a price question. It is bigger than that. Price is the part you can compute exactly; control, ownership, and legal risk are the parts that decide whether the cheaper option is actually the right one.

The cost difference, in numbers

A W-2 employee carries employer payroll taxes the contractor does not. On every dollar of wages, an employer pays 7.65% in FICA, plus FUTA and state unemployment insurance, plus whatever benefits and overhead the role needs. A $75,000 salaried hire in Texas with typical benefits costs an employer $99,323 all in — about $24,323 above base pay. A 1099 contractor at the same $75,000 contract carries none of that employer load.

But contractors price their own taxes and missing benefits into their rate, so the real comparison is rarely salary-to-contract. The honest test is the breakeven rate: the contract amount at which the 1099 costs the same as the employee. Above it, the contractor is the more expensive choice.

Side by side

W-2 employee vs 1099 contractor comparison
Factor	W-2 employee	1099 contractor
Employer payroll taxes	7.65% FICA + FUTA + state SUI	None — contractor pays self-employment tax
Benefits & workers' comp	Employer-paid (health, retirement, comp)	None
Control over work	Full — how, when, where	Limited — results only, not methods
Intellectual property	Owned by employer by default	Needs explicit assignment in contract
Ramp & retention	Invests in training; stays long-term	Fast start; can leave anytime
Flexibility to scale down	Harder — severance, UI claims	Easy — end the contract
Misclassification risk	None	High if the relationship looks like employment

When the W-2 is the right call

Hire an employee when the work is core to your business, continuous, and needs your direction, tools, and schedule. That is also the legally safe answer: work central to what you sell almost always fails prong B of the ABC test, so classifying that person as a contractor invites back taxes and penalties.

When the 1099 makes sense

Use a contractor for specialized, project-based, or short-term work the person performs independently, with their own tools and other clients. Keep the relationship genuinely independent, put IP assignment in writing, and re-check long-running engagements against your state's test.

Run your own numbers

Cost is state-specific because unemployment-insurance rates and wage bases vary widely. The hiring cost calculatorapplies your state's exact rate, and every state page comes pre-filled with local numbers and misclassification rules.

W-2 vs 1099 FAQ

Is a 1099 contractor cheaper than a W-2 employee?: Usually on paper, because you avoid the 7.65% employer FICA, FUTA, state unemployment insurance, benefits, and workers' comp. In the example below, a $75,000 employee in Texas costs $99,323 fully loaded. But a contractor who does the same work often charges more per hour to cover their own taxes and lack of benefits, which narrows the gap.
What is the breakeven contract rate?: It is the 1099 rate at which a contractor costs the same as the W-2 hire. For the $75,000 Texas example, the W-2 costs $99,323 all in, so any contract above $99,323 per year makes the contractor the more expensive option.
When should I hire a W-2 employee instead of a 1099?: Choose a W-2 when the work is core to your business, ongoing, and needs your direction and tools. That is also the legally safe choice — work central to the business usually fails the ABC test for contractors. A 1099 fits specialized, project-based, or short-term work the person performs independently.
What payroll taxes does an employer pay on a W-2 in 2026?: Employers owe 6.2% Social Security on the first $176,100 of wages, 1.45% Medicare on all wages, 0.6% FUTA on the first $7,000, plus each state's unemployment insurance. Use the calculator to apply your state's exact rate.