The 30% rule, explained.
Why a $100/hour 1099 rate is roughly equivalent to a $77/hour W2 rate. The four cost categories that an employer absorbs for an employee but a contractor must absorb for themselves.
What the uplift covers
A US W2 employee receives total compensation that the employer pays for indirectly. A 1099 contractor receives only the gross hourly rate and must absorb these costs themselves. The four categories:
- Self-employment tax (~7.65 %). The employer half of FICA (Social Security 6.2 % + Medicare 1.45 %). Employees never see this; contractors pay both halves.
- Employer-paid benefits (~20–30 %). Health insurance premiums (typically $7,000–$15,000/year), 401(k) match (~3–6 % of salary), short/long-term disability, life insurance, paid leave that doesn't apply to contractors.
- Unpaid time off (~5–10 %). A salaried employee continues to be paid during vacation, sick days, and personal days. A contractor doesn't bill for time not worked. 4 weeks of unpaid leave is roughly 8 % of annual hours.
- Business overhead (~3–8 %). Self-employment requires self-managed accounting (CPA fees), business insurance (E&O, general liability), software/equipment, and the time cost of business administration not directly billable.
Total uplift: typically 30–55 % above the W2 equivalent. The headline “30 %” rule is a conservative floor.
Worked example: $80k W2 → equivalent 1099 hourly
Starting point: $80,000/year W2 salary, US-based, professional with average benefits.
- W2 hourly equivalent at 2,080 hours:
$80,000 / 2,080 = $38.46/hour - Add self-employment tax (7.65 %):
$38.46 × 1.0765 = $41.40/hour - Add benefits replacement (25 %):
$41.40 × 1.25 = $51.75/hour - Add unpaid-time-off cushion (8 %):
$51.75 × 1.08 = $55.89/hour - Add business overhead (5 %):
$55.89 × 1.05 = $58.68/hour
Total contractor rate equivalent: ~$58/hour (uplift of ~52 % over the W2 hourly).
Or expressed as 1099 annual: $58 × 1,920 realised billable hours = ~$111,360. Note the lower hours figure (1,920 vs 2,080) because contractors don't bill for unpaid time off.
Reference table: W2 → 1099 conversion
Hourly conversion at common W2 salary levels, US, average benefits:
| W2 salary | W2 hourly | 1099 minimum hourly | 1099 standard | 1099 premium |
|---|---|---|---|---|
| $50,000 | $24.04 | $31 | $36 | $42 |
| $80,000 | $38.46 | $50 | $58 | $67 |
| $120,000 | $57.69 | $75 | $87 | $100 |
| $160,000 | $76.92 | $100 | $116 | $135 |
| $200,000 | $96.15 | $125 | $145 | $170 |
| $250,000 | $120.19 | $156 | $181 | $210 |
“Minimum” column applies the 30 % headline uplift. “Standard” applies 50 %. “Premium” applies 75 % — appropriate for highly-skilled specialists with significant business overhead (a senior litigator running their own practice, for example).
Common mistakes
- Quoting a 1099 rate at the W2 hourly equivalent. Leaves the contractor working below cost. The most common new-contractor error.
- Forgetting unpaid time off. A contractor who plans 4 weeks off must build that cost into the rate. Not doing so means working at an effective W2-equivalent rate during the 48 weeks they do work.
- Ignoring business overhead. An LLC + business insurance + accountant + software stack is typically $3,000–$8,000/year of overhead at minimum. Subtract from gross to get net.
- Comparing offshore rates apples-to-apples. An Indian contractor at $25/hour delivering software work for a US client is fully equivalent to a $50/hour US contractor only if the deliverable quality is equivalent. The cost arbitrage is real but the comparison isn't always like-for-like.