Payroll · Compliance
W2 vs 1099 Cost Comparison: The Real Employer Math
The W2 vs 1099 cost difference is the employer load a contractor invoice does not carry. On W-2 wages an employer pays 6.2% Social Security plus 1.45% Medicare, plus FUTA at 6.0% on the first $7,000 reduced to 0.6% with the state credit, plus state unemployment, workers comp and benefits. BEG runs both populations from $25 PEPM.
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Every rate below is cited to an IRS, DOL or BLS page. The worked examples are arithmetic on those published rates, not estimates. They exclude state unemployment tax, workers compensation premium and benefits, all of which vary by state, industry and employer.
The four layers of employer cost
A contractor invoice is one number. An employee costs four numbers stacked on each other, and only the first is fixed nationally. Most comparisons stop after layer one and conclude that contractors are 7.65 percent cheaper, which is wrong in both directions: it understates the employee cost and ignores what the contractor rate is quietly funding.
- Federal employer taxes. Social Security, Medicare and FUTA. Published rates, identical for everyone, computed below.
- State employer taxes. State unemployment tax at your experience-rated rate on that state taxable wage base. The most variable input in the model.
- Insurance and benefits. Workers compensation premium driven by reported payroll and class code, plus whatever you actually offer.
- Administration. Running the payroll function itself, which is the layer that gets left out of spreadsheets entirely.
Layer one, computed
IRS Topic 751 sets the current rate for Social Security at 6.2 percent for the employer and 6.2 percent for the employee, and Medicare at 1.45 percent each, so the employer share is 7.65 percent of wages. It puts the 2026 Social Security wage base at $184,500 and states there is no wage base limit for Medicare. IRS Topic 759 sets FUTA at 6.0 percent on the first $7,000 paid to each employee as wages during the year, with a credit of up to 5.4 percent where state unemployment taxes were paid in full by the Form 940 due date, giving a net rate of 0.6 percent.
| Annual wages | Social Security at 6.2% | Medicare at 1.45% | FUTA at net 0.6% on $7,000 | Federal employer tax | As a share of wages |
|---|---|---|---|---|---|
| $60,000 | $3,720 | $870 | $42 | $4,632 | 7.72% |
| $100,000 | $6,200 | $1,450 | $42 | $7,692 | 7.69% |
| $184,500 (the Social Security base) | $11,439 | $2,675 | $42 | $14,156 | 7.67% |
| $250,000 | $11,439 | $3,625 | $42 | $15,106 | 6.04% |
One rate that looks like an employer cost and is not: Topic 751 states that employers must withhold the 0.9 percent Additional Medicare Tax on wages paid in excess of $200,000 in a calendar year without regard to filing status, and that there is no employer match for it. It is a withholding and configuration obligation, not a cost line. Missing it is still an employer problem, because the withholding duty is yours.
Layer two, and why it is the one you cannot look up
State unemployment tax is set by each state and then adjusted by your own experience rating, which is why two companies with identical payrolls in the same state pay different rates. It is also the only employer cost on this page that your own past decisions move: a history of claims raises your rate in future years, so a layoff has a tail that a cancelled contractor engagement never has. The mechanics of the federal and state pieces together are in the FUTA and SUTA guide, and the state compliance checker shows the rest of a given state's payroll profile.
Topic 759 adds one wrinkle that breaks the flat $42 figure. A credit reduction state is one that has not repaid money it borrowed from the federal government to pay unemployment benefits, and employers with wages there do not receive the full 5.4 percent credit. Their effective FUTA rate is higher than 0.6 percent and Schedule A of Form 940 is required. If you have employees in more than one state, the FUTA line is not a single number.
Layer three: what benefits actually add
This is where most homemade models understate the employee side badly, usually by treating benefits as a small percentage. The Bureau of Labor Statistics measures it directly. For June 2026, employer costs for private industry workers averaged $46.89 per hour worked: wages and salaries averaged $32.82 and benefit costs averaged $14.07, so wages accounted for 70.0 percent of employer costs and benefits for the remaining 30.0 percent. For full-time private industry workers the split was $54.00 total, $36.97 in wages and $17.03 in benefits, putting benefits at 31.5 percent.
Read those as a reality check rather than as your number. BLS benefit costs include the legally required items already counted in layer one, so they cannot simply be added on top of the 7.65 percent without double counting. What the figures establish is the scale: for a typical full-time private sector employee, roughly three dollars in ten of what the employer spends is not wages. Any comparison that models an employee as salary plus a couple of percent is not a comparison.
Layer four: the administration nobody budgets
Both populations need a payroll function. The employee side needs withholding, deposits on an IRS-assigned schedule, quarterly Form 941 filings, annual Form 940, state wage reports, new hire reporting and year-end W-2s. The contractor side needs W-9 collection, payment runs and Form 1099-NEC filing at the $2,000 threshold for payments made in 2026 under the Instructions for Forms 1099-MISC and 1099-NEC. Less work, but not no work, and the penalty for missing the contractor filing is covered on the misclassification penalties page.
BEG prices that layer flat. Managed payroll runs at $25 per employee per month inside the platform you already use, or $45 per employee per month on isolved, with a $500 monthly minimum and no per-state, per-filing or year-end charge. The minimum binds below 20 employees on the existing-platform rate and below 12 on isolved, so a 10-person company pays $500 a month either way, a 25-person company pays $625 or $1,125, and a 40-person company pays $1,000 or $1,800. Full table on managed payroll pricing.
The contractor side of the ledger, honestly stated
A contractor costs the invoice and the filing, with no employer FICA, no FUTA, no state unemployment tax, no workers compensation payroll and no benefits. That is a genuine saving on paper. Three things eat most of it.
| What the invoice looks like it saves | What it does not say |
|---|---|
| No 7.65 percent employer FICA | The contractor pays both halves themselves through self-employment tax, and a sustainable rate is priced to cover it. You are paying the same money through a different line. |
| No benefits cost | The contractor self-funds insurance and absorbs unpaid time off, so the rate carries it. BLS puts benefits at 30.0 percent of private industry employer costs in June 2026, which is roughly the size of the premium being priced in. |
| No unemployment or workers compensation | Only if the classification holds. If the relationship is really employment, those obligations existed all along and the saving was never real. |
That last row is why this page cannot be read on its own. A cost comparison is only valid between two lawful options. If the worker would fail the IRS common-law test, there is no choice to price, and the correct model is the employee cost plus the expected cost of being found out. Start from the W2 vs 1099 distinction before running any numbers, and if you have already decided to move someone, the sequence is on 1099 to W-2 conversion.
How to build the number for your own payroll
- Start with gross wages for the role.
- Add 6.2 percent up to $184,500 of wages and 1.45 percent with no limit.
- Add $42 per employee for FUTA at the net 0.6 percent rate, or more if any wages sit in a credit reduction state.
- Add your state unemployment rate on that state taxable wage base, using your own experience rate rather than the new employer rate if you have one.
- Add workers compensation premium at the class code matching the actual work.
- Add your real benefit cost, checking it against the BLS 30.0 percent share as a sanity test rather than using the share as your figure.
- Add the payroll administration line, $25 or $45 per employee per month with the $500 minimum.
- Compare the total to the contractor invoice you would otherwise pay for the same output, including the rate premium that funds their side.
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Frequently Asked Questions
How much more does a W-2 employee cost than a 1099 contractor?
The federal statutory piece is knowable to the dollar. IRS Topic 751 sets the employer Social Security rate at 6.2 percent and Medicare at 1.45 percent, so 7.65 percent of wages. IRS Topic 759 sets FUTA at 6.0 percent on the first $7,000 of wages per employee, reduced to 0.6 percent where the full 5.4 percent state credit applies, which is $42 per employee per year at the net rate. State unemployment tax, workers compensation premium and benefits sit on top and vary.
What is the total employer tax on a $100,000 salary?
Using the published rates: Social Security at 6.2 percent is $6,200, Medicare at 1.45 percent is $1,450, and FUTA at the net 0.6 percent on the first $7,000 is $42. That is $7,692 in federal employer tax, about 7.69 percent of salary, before any state unemployment tax, workers compensation premium or benefits. Nothing in that stack applies to a contractor invoice.
Does the employer cost percentage fall at higher salaries?
Yes, because Social Security is capped and Medicare is not. IRS Topic 751 puts the 2026 Social Security wage base at $184,500 and states there is no wage base limit for Medicare. At a $250,000 salary the Social Security piece stops at $11,439, Medicare runs the full $3,625, and FUTA adds $42, totalling $15,106 or about 6.04 percent. The same arithmetic at $100,000 gives 7.69 percent, so the employer load is regressive across a salary band.
Does the 0.9 percent Additional Medicare tax cost the employer anything?
No. IRS Topic 751 states that employers are responsible for withholding the 0.9 percent Additional Medicare Tax on an individual wages paid in excess of $200,000 in a calendar year without regard to filing status, and that there is no employer match for it. It is a withholding obligation and a payroll configuration item, not an employer cost. It does need to be set up correctly, because the employer is responsible for the withholding.
What do benefits add on top of the payroll taxes?
More than most estimates assume. BLS Employer Costs for Employee Compensation for June 2026 puts private industry compensation at $46.89 per hour worked, of which wages and salaries averaged $32.82 and benefit costs averaged $14.07, so benefits accounted for 30.0 percent of employer costs. For full-time private industry workers the figures were $54.00 total, $36.97 wages and $17.03 benefits, or 31.5 percent.
Is a contractor actually cheaper once you include their rate premium?
Often not, which is the point most comparisons miss. A contractor rate has to self-fund both halves of Social Security and Medicare, their own equipment, their own insurance and their own unpaid time off. A rate set to cover all of that is normally well above the hourly equivalent of the salary you would pay, so the employer tax saving is spent on the premium. Compare total employer outlay against total employer outlay, not 7.65 percent against zero.
What does FUTA actually cost per employee per year?
At the net rate, $42. IRS Topic 759 applies the 6.0 percent FUTA rate to the first $7,000 paid to each employee as wages during the year, with a credit of up to 5.4 percent for state unemployment taxes paid in full by the Form 940 due date, giving a net 0.6 percent. Six dollars a month per employee is a rounding error on a salary and a real number across a hundred seasonal hires.
What is a credit reduction state and what does it do to the number?
IRS Topic 759 describes a credit reduction state as one that has not repaid money it borrowed from the federal government to pay unemployment benefits. Employers with wages in such a state do not get the full 5.4 percent credit, so their effective FUTA rate is above 0.6 percent and Schedule A of Form 940 has to be filed. It is the one line in the FUTA calculation that is not the same everywhere.
Does state unemployment tax change the comparison much?
It can, and it is the most variable input in the whole model. SUTA rates are set by each state and adjusted by your own experience rating, so two employers with identical payrolls in the same state can pay materially different rates depending on their claims history. That also makes it the one employer cost that a layoff decision moves in future years, which no contractor arrangement ever does.
What about the cost of running payroll itself?
It is a real line and it is usually left out. Managed payroll from BEG runs $25 per employee per month inside the platform you already use or $45 per employee per month on isolved, with a $500 monthly minimum. The minimum binds below 20 employees on the existing-platform rate and below 12 on isolved, so a 10-person company pays $500 a month either way. That covers deposits, filings, new hire reporting, W-2s and contractor 1099s.
Is there a headcount where the math flips?
There is no universal headcount, but there is a shape to it. Statutory cost per employee is a percentage, so it scales linearly with payroll. Administrative cost per employee falls as headcount rises, because the $500 minimum is spread across more people. That means the per-head cost of running employees is highest at the smallest sizes, which is exactly the size at which companies reach for contractors, and it is the wrong reason to reach for them.
What cost does misclassification add to the model?
A contingent one that belongs in any honest comparison. If the worker is genuinely an employee, the saving was never real, because the taxes were always owed. The expected cost is the assessment plus information return penalties plus the wage and hour exposure, weighted by the chance it comes up. The figures and the relief provisions are set out on our worker misclassification penalties page.
How do we model this for our own headcount?
Take gross wages, apply 7.65 percent for the employer FICA share up to the $184,500 Social Security base and without limit for Medicare, add $42 per employee for FUTA at the net rate, add your state unemployment rate on that state taxable wage base, add your workers compensation premium, add your actual benefit cost, then add the payroll administration line. Compare that total to what you would pay a contractor for the same output, including their rate premium.
Primary sources: IRS Topic no. 751, IRS Topic no. 759, Instructions for Forms 1099-MISC and 1099-NEC, and BLS Employer Costs for Employee Compensation, June 2026. BEG pricing is the published managed payroll rate. Individual results vary.
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