Contractor rate vs salary equivalent

Leaving a $100,000 job for contract work takes about $102,222 of profit to keep the same amount of money. irs.gov Not the figure a 30% uplift would give you.

The standard advice — add 30% because self-employment tax will eat you alivenot measured — gets the mechanism right and the size wrong by an order of magnitude. Here is where it goes astray, and what the real argument for charging more actually is.

The tax difference is real, and then mostly refunded

An employee pays 7.65% in FICA and their employer pays the matching half. A contractor pays both. irs.gov

The gap that everyone quotes

Salary	Employee FICA	Self-employment tax on the same amount	Difference
$60,000	$4,590	$8,478	$3,888
$80,000	$6,120	$11,304	$5,184
$100,000	$7,650	$14,130	$6,480
$150,000	$11,475	$21,194	$9,719

$6,480 on a $100,000 income. That is the figure the usual advice is built on, and taken alone it looks decisive.

But three things claw most of it back

Only 92.35% of profit is subject to the tax, because the employer-equivalent half comes out of the base first. irs.gov

Half of what you do pay is deductible against income tax, above the line.

The QBI deduction takes up to 20% off your taxable income — and it does not exist for an employee at all. irs.gov

That third one is the piece the standard advice ignores completely, and it is the largest of the three.

What it actually takes to match

Single filer, no state income tax, comparing an employee’s take-home against the profit a contractor needs to match it:

Salary	Employee keeps	1099 profit needed	Uplift
$60,000	~$50,390	$63,154	+5%
$80,000	~$65,110	$82,284	+3%
$100,000	~$79,180	$102,222	+2%

The employee figure is federal only — FICA plus income tax with the standard deduction. State tax and any benefit deductions are excluded on both sides.

Two to five percent. The uplift falls as income rises, because the QBI deduction is doing more work at higher profits.

On tax alone, contract work is close to a wash.

So why does everyone say 30%?

Because the tax argument is a proxy for a real argument that is harder to state, and the number attached to it is roughly right for the wrong reason.

What actually costs you as a contractor:

Health insurance. For a US freelancer this is frequently the single largest expense, and an employer was paying most of it. It is genuinely deductible, which softens it, but it is a bill that did not exist before.

Unpaid time. Holiday, sickness, and the weeks between engagements. An employee is paid for 52 weeks and works about 46. A contractor is paid for the weeks they bill.

Utilisation. Sales, invoicing, admin and unconverted proposals do not bill. The share of your hours that actually bills is a larger adjustment than every tax effect combined.

Retirement. No employer match. A Solo 401(k) has generous limits, but every dollar in it is yours.

Equipment, software, insurance, an accountant. Small individually and not small together.

Risk. No notice period, no severance, no unemployment insurance. That has a price even when it is hard to name.

The honest version of the calculation

Start from the take-home you need, not from a percentage on top of an old salary. The rate floor calculator solves it properly — the tax part is circular, since tax depends on revenue and revenue is what you are solving for.

Then add the things above as line items in expenses, rather than as a vague uplift. Health insurance is a number. Unpaid weeks are a number. Utilisation is a number you can measure from last month.

The usual 30% is not wrong as a totalnot measured — it is just that almost none of it is tax, and calling it tax means people budget for the wrong things.

Where this stops applying

The comparison assumes the same work. Contract work is often different work — more scope control, less meeting time, more delivery risk — and comparing hour for hour with an employed role misses that.

It also ignores what a salary buys that is not money: predictable cash flow, a stable client, and someone else worrying about where next quarter’s work comes from. Some people should be employed, and the arithmetic here does not decide that.