I've been on a w2 pretty much forever, but am negotiating with a company that wants me to work on a contract-to-hire 1099 basis. Is there a straightforward way to calculate what my 1099 hourly rate should be based on my current w2 salary? I'm not looking to make more money at this point, so I just want to make sure that my net income is the same.

Assume no 401k, insurance etc.

Most often people will use hourly pay rate times three to determine a general freelance rate. But that's merely a ballpark. There's no "one method" which is accurate for everyone. Your general overhead as a contractor is higher because employers aren't paying for many things. In some cases basic necessities to work such as electrify and equipment. So typically a freelance rate is 3x what a current hourly rate may be as a general guide.

If you are not interested in covering overhead - e.g. electricity, water, equipment, supplies, etc - because you will be working on site. Then you need to factor in your current employer contributions. If the employer is matching 401k, that may stop. You won't have paid vacation, sick, or personal days. If the employer is covering health insurance, that will stop. Health insurance is a BIG one because it's going to cost you way more as a contractor than it does an an "employee". I still would lean towards the hourly x 3 though. But if you like the employer you could possibly do hourly x 2 since they will still be paying for general overhead such as equipment and electricity.

Be aware, may employers try and put workers into a 1099 arrangement so they can avoid things like health insurance and workman's compensation. The IRS started cracking down on this behavior, but that does not mean it has stopped.

If an employer tells you when to work, what to work on, provides tools for work... then they are an employer not a 1099 freelancer/contractor client. I realize that may not matter a whole lot to you, but you should be aware that if the employer is attempting to put you in a position better for them, but worse for you, you may just want to find a new job.

  • Thanks, but I'm not actually looking to increase my net income as the job is relatively secure and is actually a contract-to-hire situation. I just want to cover any potential additional costs (e.g. increased tax burden). I'm just wondering if there is a general rule-of-thumb calculation (multiple w2 by x) to cover most situations. – Warren Payne Sep 7 at 12:44
  • @WarrenPayne Ermm... That's exactly what I posted.. current hourly wage x 3. – Scott Sep 7 at 15:48
  • No, that would triple my gross pay, wouldn't it? What am I missing here? – Warren Payne Sep 7 at 15:49
  • @WarrenPayne If you earn $20/Hr.. the freelance rate would be $60/hr. It is higher because, as you mention in the question, your employer will not be paying for all the overhead. it will fall upon you to pay for electricity, water, sick days, retirement, insurance, equipment, supplies, etc. There are all sorts of overhead costs employers cover. If you are a contractor, you must cover those costs, rates increase due to that. – Scott Sep 7 at 16:38
up vote 0 down vote accepted

The most common solution I've found is to multiply W2 rate/salary by 1.2 to maintain the same net income (which is all I was looking to do).

  • I would find an addition 20% to be inadequate. But to each his (or her) own. – Scott Sep 9 at 19:12
  • The only additional burden for me is tax-related. No utilities, travel etc. – Warren Payne Sep 9 at 19:27
  • Health Insurance? Vacations? Sick Days? And the tax burdens can be considerable. Remember you'll pay Social Security, self-employment, etc. all yourself. I think 1.2 is a bit short-sighted. But again, if it works for you, that's great! – Scott Sep 9 at 20:46
  • Nope don't need to worry about any of those, hence how I worded my question. All that was already built into my w2 rate, which is why I was focused on the additional tax aspect of 1099.. – Warren Payne Sep 9 at 20:50
  • Oh I wish I could impart 30 years of experience to you in order to save you so much surprise and headache later... but.. as the saying goes.. you can lead a horse to water..... "all that" was NOT "built into the w2 rate" There are additional taxes your employer pays which are not reflected on your paycheck. In your attempt to not appear "greedy" you are going to cut yourself short, undoubtedly. – Scott Sep 9 at 21:12

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