A salary is only part of what an employee costs, and an hourly rate is all a contractor costs. Put both side by side, with payroll taxes and benefits included, and see the real number. Takes about two minutes, no email needed.
Employer payroll taxes use 2026 federal rates: 7.65% on wages, with the 6.2% Social Security portion capped at $184,500, plus $42 of federal unemployment tax. State taxes and fees vary, so add yours under other employee costs. A cost estimate only, not legal or tax advice on how to classify a worker.
An employee costs more than their salary. You pay half of their Social Security and Medicare, federal and state unemployment tax, workers' comp, benefits, and the software and time it takes to run payroll. For most small businesses that adds 15% to 30% on top of salary.
A contractor's rate already covers their own taxes and benefits, so what you pay is what it costs. The trade is control. You're paying for a result, not for someone whose hours, methods and priorities you set. That's why the cheaper number on this page isn't always the right answer.
Whether someone is a contractor or an employee is a legal question, not a budget choice. Calling someone a contractor to save on payroll tax is one of the most common and expensive mistakes a growing business makes.
If you set their hours, train them, provide their tools and direct how the work gets done, the IRS and the Department of Labor will likely see an employee, no matter what the contract says.
Get it wrong and you can owe back payroll taxes, penalties and interest, plus unpaid overtime and benefits. These claims often surface when a worker files for unemployment.
Some states use tougher tests than the IRS, which makes it harder to treat ongoing, core work as contract work. Check your state's rules before you decide.
Collect a W-9 before the first payment, and file a 1099-NEC by January 31 for anyone you paid $2,000 or more in the year. That threshold rose from $600 starting with 2026 payments. A written agreement should cover scope and who owns the work.
Withholding, quarterly and year-end payroll filings, state registration and new hire reporting all come with the first employee. Payroll services handle most of it, for a fee.
A contractor is easy to start and easy to end. An employee is a longer commitment, but often the better choice for core, ongoing work you want done your way.
Balanced runs payroll for employees, handles contractor 1099s, and keeps both clean on the books so you can see what each hire really costs. We'll walk through the numbers with you before you make the call.
For most small businesses, 15% to 30% more once you add employer payroll taxes, unemployment insurance, workers' comp, benefits and payroll costs. The calculator above works out your own number.
Take the employee's total yearly cost and divide it by the hours you'd actually need. The calculator shows this as the employee cost per hour, so you can compare it directly with a contractor's rate.
No. Classification depends on how the work is done, mainly how much control you have over it, not on what you call the person or what the contract says. Misclassifying an employee can mean back taxes, penalties and interest.
Collect a W-9 before you pay them, and file Form 1099-NEC by January 31 for any contractor you paid $2,000 or more during the year. The threshold was $600 through 2025 payments.
Yes. We run payroll, file contractor 1099s and keep every hire tracked on the books. Book a free discovery call and we'll look at your setup together.
