What is the break-even 1099 rate?

It is the hourly rate at which a subcontractor costs you exactly what the employee costs you, all-in. Above it the sub is more expensive, below it the employee is. It is useful mainly as a negotiating anchor and as a sanity check on rates you are already paying — many owners find they are paying subs well above the break-even without having done the comparison.

Does this account for the 1099 filing itself?

Not as a cost line, because it is small. It is worth remembering though: any unincorporated sub you pay $600 or more in a year needs a 1099-NEC, and you need a W-9 from them to file it. Collect the W-9 before the first payment rather than chasing it in January, which is the point at which the ones who are hardest to reach stop answering.

What about the productivity difference?

This calculator compares cost at equal output, because output is the thing only you can judge. If your employee is more productive per hour than a sub — which is common, since they know your systems, your trucks and your customers — then the employee wins at a rate higher than the break-even shown here. Adjust the hours if you want to model that.

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1099 vs W-2 cost calculator

A $28 an hour employee and a $38 an hour sub are closer than they look once payroll tax, workers comp, benefits and paid time off are counted. This works out both true costs and the 1099 rate at which they break even.

Method reviewed by Darren Lim, US CPALicence CPA.74253602

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Break-even sub rate

$37.67

Pay a sub more than this and the employee is cheaper. Pay less and the sub is — before anything that is not money.

Wage$58,240

Payroll taxes$5,242

Workers comp$4,659

Benefits$5,400

Uniforms, phone, tools, training$1,800

True cost of the employee29% on top of the wage$75,341

Hours you pay for2,080 hrs

Hours you actually get10 days of PTO is 80 hours you buy and do not receive2,000 hrs

Employee, per hour worked$37.67

Sub, per hour worked$38.00

The sub costs more byAt these hours, the employee is the cheaper of the two.$659/yr

Difference per hour$0.33

The sub figure assumes a current certificate of insurance on file. A sub without one can be reclassified at a workers comp audit and billed to you retroactively for every hour they worked, which turns the cheaper option into the more expensive one after the fact.

This is a cost question, not a classification question

Worker classification is decided by law, not by which option is cheaper. The IRS applies a common-law test around behavioural control, financial control and the nature of the relationship; the Department of Labor applies its own economic-reality analysis; and several states — California, Massachusetts, New Jersey among them — apply a stricter ABC test that presumes employment unless all three prongs are met. Some states also treat uninsured subs as employees for workers compensation purposes regardless of how you paid them.

So run this to understand the economics, and take the classification decision on the facts of the working relationship with an employment attorney or your CPA. Getting it wrong is expensive in a specific way: back taxes, penalties, interest, and a workers comp audit that reclassifies your subs and bills you the premium retroactively.

What the employee side actually costs

Wage, then the employer half of FICA at 7.65 percent, then federal and state unemployment, then workers compensation at your trade’s rate. Then the things that do not appear on a payroll register at all: health cover, any retirement contribution, the phone, the uniform, the training, and paid time off — which is not an added cost so much as a reduction in the hours you get for the money.

Paid time off is the one that surprises people. Ten days of PTO on a 2,080 hour year means you are paying for 2,080 hours and receiving 1,960, which raises the effective cost of every hour you actually receive by about 6 percent before anything else is added.

What the 1099 side does not include

A sub’s rate is the whole cost on paper, which is what makes it look expensive per hour and cheap overall. What it does not include is the control you give up over scheduling and method, the fact that the sub can and will work for someone else on the day you need them, and the risk that they carry no insurance of their own.

That last one has a price. If a sub without a certificate of insurance is hurt on your job, or if your workers comp carrier reclassifies them at audit, the premium lands on you for every hour they worked. Collecting current certificates of insurance from every sub, every year, is what makes the 1099 number in this calculator the real one rather than the optimistic one.

Common questions

What is the break-even 1099 rate?: It is the hourly rate at which a subcontractor costs you exactly what the employee costs you, all-in. Above it the sub is more expensive, below it the employee is. It is useful mainly as a negotiating anchor and as a sanity check on rates you are already paying — many owners find they are paying subs well above the break-even without having done the comparison.
Does this account for the 1099 filing itself?: Not as a cost line, because it is small. It is worth remembering though: any unincorporated sub you pay $600 or more in a year needs a 1099-NEC, and you need a W-9 from them to file it. Collect the W-9 before the first payment rather than chasing it in January, which is the point at which the ones who are hardest to reach stop answering.
What about the productivity difference?: This calculator compares cost at equal output, because output is the thing only you can judge. If your employee is more productive per hour than a sub — which is common, since they know your systems, your trucks and your customers — then the employee wins at a rate higher than the break-even shown here. Adjust the hours if you want to model that.

What we do about it

We keep subcontractor payments separated and W-9-backed through the year, so 1099-NEC filing in January is a report rather than an archaeology project, and so a workers comp audit finds certificates of insurance already attached to the subs they cover.