Contractor vs Employee Cost Comparison

Start with the salary, then add what the law requires on top. IRS Publication 15 puts the employer's share at 6.2% Social Security tax on wages up to $184,500 in 2026, plus 1.45% Medicare tax with no cap¹. Federal unemployment tax is 6.0% of the first $7,000 of wages, and the maximum credit for paying state unemployment tax cuts it to 0.6%, or $42 a year per employee.

Your state sets its own unemployment tax rate and wage base, and workers' compensation insurance is priced by the type of work. Then come benefits. KFF, an independent health policy research group, surveys employers every year. In 2026, single health coverage averaged $9,804 a year, and workers paid $1,672 of it², leaving the employer about $8,100.

Add any retirement match, the laptop and software seats, and payroll fees. Use your own plan invoices rather than averages wherever you have them. A headcount planning and cost template keeps these lines together for every role you plan.

The invoices are only the start. Anything you would supply either way, such as a laptop, software seats or a manager's time spent directing the work, belongs in both columns at what it really costs. Leave it out of the contractor's column and that route looks cheaper than it is. Add agency or platform fees if you pay them.

Don't be put off by a rate that looks high next to a salary. A contractor pays self-employment tax of 15.3% for Social Security and Medicare³, where an employee has 7.65% withheld. They also buy their own health cover and equipment, and their rate has to carry the weeks they can't bill.

A full-time salary pays for 2,080 hours a year, but nobody works all of them. Take out, say, 10 holidays and 15 days of leave, and about 1,880 hours of work remain. Divide the employee's total by hours worked and the contractor's by hours billed. Skip a separate line for paid time off, because the salary already pays for it.

The Bureau of Labor Statistics measures employer costs the same way, per hour worked. In June 2026, full-time private-industry workers cost employers $54.00 per hour worked, and $17.03 of it, or 31.5%, was benefits⁴.

Calling someone a contractor doesn't make them one. The IRS weighs behavioral control, financial control and the type of relationship⁵, and says no single factor or set number of factors decides it. Many costs you just counted are also evidence: supplying the laptop is financial control, and a manager directing the work is behavioral control.

If the worker is reclassified, you may be able to figure the bill at the special section 3509 rates in Publication 15¹. When you filed the required Forms 1099, they generally come to 10.68% of pay: 7.44% for Social Security, 1.74% for Medicare and 1.5% for income tax. When you didn't, they rise to 13.71%. Interest and any penalties come on top.

Those rates already include your full employer share. Only the employee's share is discounted, and you can't recover it from the worker. If you intentionally disregarded the withholding rules, the reduced rates don't apply at all.

At best, the federal bill may be zero. Section 530 relief⁵ can excuse the taxes if you had a reasonable basis for treating the worker as a contractor. You must also have filed every required Form 1099 and never treated anyone in a similar job as an employee. State agencies and wage laws apply their own tests, so run the facts through a contractor vs employee classification check too.

Treat the saving and the exposure as a bet. In the example, the contractor route comes out ahead only if the chance of reclassification is below about 15%: $2,800 saved against $18,770 of new exposure each year. The control facts are your best guide to which side of that line you're on.

To convert, look at the IRS Voluntary Classification Settlement Program⁶. You pay 10% of the section 3509 amount on your last closed tax year, with no interest or penalties and no employment tax audit of earlier years over these workers. To qualify, you must have treated them as contractors for the last three years, filing every required Form 1099, and not be under an employment tax or classification audit.

Apply on Form 8952 at least 120 days before the switch. If it filed every Form 1099 and applies in late 2026, the example company would pay 10% of 10.68% of its 2025 invoices: $1,600.40, against $50,922.24 of exposure. To keep a contractor instead, make the independence real, sign an independent contractor agreement, and keep a 1099 filing checklist so the filings that protect you never lapse.

The tool at the top of this page does these sums for you. It prices both routes from your own invoices and offer, then works out the exposure and the settlement payment.