Contractor vs W-2

The Department of Labor’s fact sheet on who counts as an employee contains this sentence: “It is not determined by the common law standards relating to master and servant.” The common law standards are exactly what the IRS uses. Two federal agencies, both with authority over your working life, have published tests that do not match, and a single person can be an employee for one of them and a contractor for the other. The calculator above prices the tax consequence of one answer. It cannot tell you which answer is yours, and no calculator can.

What it can do is arithmetic. At $80,000 a year, 2026 rates, single, nothing deferred and no state tax, the employee keeps an estimated $65,110.00 and the contractor keeps $61,169.76: a gap of $3,940.24, or 4.9% of gross. Every figure below comes from a named line of a named IRS form, and the ones that do not are flagged.

Nobody settles this once

There is no single federal register of worker status. The question gets answered separately, by different bodies, under different statutes, each time it matters:

• For federal employment tax — income tax withholding, Social Security, Medicare, FUTA — the IRS applies the common-law test. IRS Topic no. 762 opens: “For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee.”
• For minimum wage and overtime under the Fair Labor Standards Act, the Wage and Hour Division applies an economic-reality test that it says explicitly is not the common-law test.
• In a private lawsuit under the same Act, a court applies whatever regulation is in force, which as of this writing is not the test the Division’s own investigators are using. More on that below, because it is the strangest fact on this page.
• For state unemployment insurance, state wage law and workers’ compensation, each state applies its own test. Several are materially stricter than both federal tests. None of them is modelled here.

So “am I really a contractor?” is not one question. It is at least four, and you can get different answers to them in the same calendar year on the same work.

The IRS test: three categories and no scorecard

The IRS groups the evidence into three buckets, and its page on the subject states them in these words:

• Behavioral. “Does the company control or have the right to control what the worker does and how the worker does his or her job?”
• Financial. “Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)”
• Type of relationship. “Are there written contracts or employee type benefits (that is, pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”

The part people skip is the warning that follows: “There is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.” There is no threshold, no points total, no checklist that returns a verdict. Anyone showing you a twenty-factor quiz that outputs an answer is selling you certainty the IRS does not claim to have.

If the answer genuinely matters — a reclassification dispute, a payer who will not withhold, a large back-tax exposure — there is a formal route. Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, may be filed “by either the business or the worker”, and “The IRS will review the facts and circumstances and officially determine the worker’s status.” That determination binds the IRS. It does not bind the Labor Department, your state, or a court.

The Labor Department’s test, which is currently two tests

This is the part no competitor page we can find states, and it is a live, dated fact rather than a rule of thumb.

In January 2024 the Wage and Hour Division published a rule setting out a six-factor economic-reality analysis. The public fact sheet still describes it: opportunity for profit or loss depending on managerial skill, investments by the worker and the employer, permanence of the relationship, nature and degree of control, whether the work is integral to the employer’s business, and skill and initiative. It is also unusually blunt about labels: “agreeing verbally or in writing to be classified as an independent contractor — including by signing an independent contractor agreement — does not make a worker an independent contractor under the FLSA.”

Then, on 1 May 2025, the Division issued Field Assistance Bulletin No. 2025-1, which tells its own investigators to stop using that rule: “WHD will no longer apply the 2024 Rule’s analysis when determining employee versus independent contractor status in FLSA investigations. WHD will enforce the FLSA in accordance with Fact Sheet #13 (July 2008), and as further informed by Opinion Letter FLSA2019-6…” And then, in the same bulletin: “Until further action is taken, the 2024 Rule remains in effect for purposes of private litigation.”

Read that twice. If a federal investigator looks at your job, they apply a 2008 framework of seven Supreme Court factors. If you sue your employer yourself over the same job, the court applies a 2024 regulation with six. On 26 February 2026 the Department proposed to rescind the 2024 rule outright (RIN 1235-AA46, docket WHD-2026-0001, comments closed 28 April 2026); as of 2 October 2026 that proposal has not been finalised, so both tests remain live in their respective lanes.

The 2008 framework the investigators are using lists these as the factors the Supreme Court has found significant: whether the services are an integral part of the principal’s business; permanency of the relationship; the contractor’s investment in facilities and equipment; the nature and degree of control by the principal; opportunities for profit and loss; the amount of initiative, judgment or foresight required for success in open-market competition; and the degree of independent business organization and operation. It adds that “the total activity or situation” controls, and that there is “no single rule or test.”

Two places the two agencies openly disagree

These are not shades of emphasis. They are direct contradictions between the published texts.

1. The contract. The IRS lists “written contracts” as evidence under type of relationship. The 2008 Labor fact sheet names “the absence of a formal employment agreement” among facts that “are not considered to have a bearing” on the determination, and the 2024 fact sheet says signing a contractor agreement does not make you one. One agency reads the paperwork as evidence; the other has written it off.
2. Employee-type benefits. The IRS asks whether there are “employee type benefits (that is, pension plan, insurance, vacation pay, etc.)”. Neither Labor factor list mentions benefits at all. A payer who gives you no pension, no insurance and no vacation has moved one IRS factor and none of Labor’s.

So a payer can hand you a 1099-NEC, a signed contractor agreement and no benefits, and be wrong under the Fair Labor Standards Act about overtime while being arguably right under the common-law test about withholding. The paperwork is one piece of evidence in one of the tests.

Once status is settled, the tax side is a form, not a judgement

Self-employment tax is computed on Schedule SE (Form 1040), and the form’s line numbers are worth knowing because they explain every oddity in the calculator above. Walked at $80,000 of profit, no expenses:

• Line 4a — “multiply line 3 by 92.35% (0.9235)”. $80,000 becomes $73,880.00. This is the figure every later line uses, and it is why the tool shows 92.35% in its own subtitle.
• Line 4c — “If less than $400, stop; you don’t owe self-employment tax.” A real floor, and one this calculator does not apply. See the limits section.
• Line 7 — the maximum of combined wages and self-employment earnings subject to the Social Security portion. For 2026 that ceiling is the $184,500 wage base from Publication 15.
• Line 10 — “Multiply the smaller of line 6 or line 9 by 12.4% (0.124)”. Here $73,880.00 × 0.124 = $9,161.12.
• Line 11 — “Multiply line 6 by 2.9% (0.029)”, with no ceiling at all: $2,142.52.
• Line 12 — the two added: self-employment tax of $11,303.64.
• Line 13 — “Deduction for one-half of self-employment tax. Multiply line 12 by 50% (0.50)”: $5,651.82, which comes off income before federal income tax but, the IRS is explicit, “does not affect either your net earnings from self-employment or your self-employment tax.”

So the contractor’s federal income tax starts from $80,000 − $5,651.82 − the $16,100 standard deduction = $58,248.18 of taxable income, giving $7,526.60. The employee on the same $80,000 has no equivalent subtraction — the IRS puts it in one sentence, “Wage earners cannot deduct Social Security and Medicare taxes” — so their taxable income is $63,900.00 and their federal income tax is $8,770.00, $1,243.40 more. The contractor is ahead on income tax and $5,183.64 behind on payroll tax. Net of both, $3,940.24 behind.

The 92.35% is not a discount, it is the employer’s deduction handed over

“Contractors pay both halves” is the usual summary and it is slightly wrong in a way that is worth $936.36 on $80,000. Both halves of FICA on $80,000 would be 15.3%, or $12,240.00 — and the employee’s own share, 6.2% to the base plus 1.45%, is exactly half of that at $6,120.00, with the employer owing the other $6,120.00. But self-employment tax is 15.3% of 92.35% of profit, which is 14.1295% of profit, or $11,303.64. The 7.65% haircut exists because an employer gets to deduct its half of FICA as a business expense before computing its own income, and a sole proprietor has no separate employer to do that; line 4a approximates the same relief by shrinking the base.

Above $184,500, and above $200,000

Two ceilings change the shape of the comparison at higher income, and the tool handles both, so it is worth seeing where they land.

The 12.4% Social Security portion stops at the wage base. On $200,000 of profit, net earnings are $184,700.00, which is $200 over the base, so the Social Security portion is 12.4% × $184,500 = $22,878.00 and stays there however high profit goes. The Medicare 2.9% has no ceiling: on the same $200,000 it is $5,356.30, and on $400,000 of profit it keeps climbing. Above the base, each extra dollar of profit costs 2.9% rather than 15.3%, which is the single largest reason a high-income contractor’s effective rate falls as income rises.

The 0.9% Additional Medicare Tax then arrives, and the thresholds are the taxpayer’s own, not an employer’s: $250,000 married filing jointly, $125,000 married filing separately, $200,000 for everyone else, including head of household. On $250,000 of profit, net earnings of $230,875.00 are $30,875.00 over the single threshold, which is $277.88 of Additional Medicare. Note that this is the one FICA-family tax where the employee and the contractor are treated identically: there is no employer match for it, so nobody is paying a second half.

One asymmetry the comparison cannot show you: for an employee, the employer must begin withholding the 0.9% once wages pass $200,000 regardless of filing status, so a married-filing- jointly employee earning $220,000 has it withheld and then reclaims it on the return. A contractor settles it only on the return. Same tax, different cash-flow year.

The money neither column contains

The gap above is a tax gap. The decision is not a tax decision, and four things sit outside the calculator entirely.

The employer’s $6,120.00. On a $80,000 W-2 salary the employer pays $6,120.00 of its own FICA, and the paystub decoder shows that sitting beside the employee lines. That money is real compensation cost that never appears on either side of this page, and it is the honest reason a contractor rate below the salary it replaces is a pay cut twice over.

Benefits, which have no rate. Health premiums, retirement match, paid leave, unemployment insurance eligibility, workers’ compensation coverage. The Fair Labor Standards Act does not require paid vacation at all, so for an employee this is employer policy; for a contractor it is usually absent entirely. We can price none of it, and any page that gives you a percentage for it has invented the percentage.

Quarterly timing. An employee’s tax arrives in instalments automatically. A contractor generally has to send it. The IRS rule is a dollar threshold: individuals “generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed”, and estimated tax “is used to pay not only income tax, but other taxes such as self-employment tax”. The relief is also precise: most taxpayers avoid the underpayment penalty if they owe under $1,000 after withholding and credits, “or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.” On the $80,000 example that is $18,830.24 of federal tax to schedule yourself.

The expense field is a promise, not a deduction. Entering 20% on $80,000 moves the estimated contractor net from $61,169.76 to $49,999.66 — a $15,110.34 gap to the employee rather than $3,940.24 — because expenses reduce profit and therefore reduce income. That is the arithmetic of a real deduction. It is not evidence you have one. Deductions need records, and a 20% figure typed into a box is a hypothesis.

Where this calculator stops being right

Two limits, in rough order of cost.

1. The state percentage is capped at 20, which is what the box says. Type more and it computes 20, with no warning on screen. Until 3 October 2026 the box said 15 while the engine allowed 20, so the two disagreed about what was even accepted. No state levies a flat percentage of everything. The two columns are not even comparable: the W-2 side charges the rate on wages after any deferral ($12,000.00 at 15% on $80,000), the 1099 side charges it on profit after the half-SE deduction ($11,152.23). Most states start from federal adjusted gross income, which does include that deduction, so the contractor treatment is the more realistic of the two — but neither is your state’s law.
2. Mixed years are not modelled, and that is the common case. Schedule SE line 9 subtracts W-2 Social Security wages from the wage base before applying 12.4%, so somebody who earned $120,000 on a W-2 and $60,000 on 1099s does not get a fresh $184,500 of base for the contractor half. Neither does the Additional Medicare threshold, which counts wages and self-employment income together. If you left a job mid-year, this page is comparing two hypothetical whole years, not your actual one.

The $400 floor is applied. Schedule SE line 4c reads “Combine lines 4a and 4b. If less than $400, stop; you don’t owe self-employment tax.” Enter $400 of gross with no expenses and the self-employment tax reads $0.00, because net earnings are $369.40. It starts being charged once profit reaches about $433, where the 92.35% multiplier brings net earnings to exactly $400. Until 3 October 2026 this tool charged $56.52 there. One caveat the form carries and this page cannot: the same line excepts church employee income, which is not an input here, so if you have any, this floor is not yours to rely on.

What was checked and is right: all eighteen band edges across the three filing statuses this page can produce were compared against Revenue Procedure 2025-32, on both sides of every edge, and all eighteen agree, including the head-of-household 32% band at $201,750. That band carried $201,775 here until 3 October 2026, which is the single filer’s figure, and understated head-of-household federal tax by a flat $2.00. The annual W-2 figures were a multiplication of one paycheck until the same date, and now come from the year’s own components; at $240,000 the W-2 column reads $176,617.00 and the headline gap −$9,501.27, where they read $173,536.00 and −$6,420.27 before.

And one thing this page deliberately will not tell you. The widely-repeated advice to charge 20–30% more as a contractor has no authority behind it that we could find, and we looked. It is not in any IRS or Labor Department publication. The sourced components of a rate difference are these: 14.1295% of profit in self-employment tax, an employer FICA contribution of 7.65% of wages that you will no longer receive, no statutory paid leave, and a $1,000 threshold that makes the tax your scheduling problem. Build your number out of those. Do not inherit it from a forum.

Sources

• IRS Topic no. 762, Independent contractor vs. employee — that the common-law rules govern “for federal employment tax purposes”, and the three categories of evidence: behavioral control, financial control, and relationship of the parties. Page last reviewed 24 September 2026, read 2 October 2026.
• IRS, Independent contractor (self-employed) or employee? — the wording of the three categories quoted above, the “no ‘magic’ or set number of factors” warning, and that Form SS-8 may be filed by either the business or the worker for an official determination.
• U.S. Department of Labor, Fact Sheet #13: Employment Relationship Under the FLSA (revised March 2024) — the economic-realities framework, the six factors, and that a signed contractor agreement does not make a worker a contractor under the Act.
• Wage and Hour Division, Field Assistance Bulletin No. 2025-1 (1 May 2025) — that WHD will no longer apply the 2024 rule’s analysis in investigations and will enforce in accordance with Fact Sheet #13 (July 2008) as further informed by Opinion Letter FLSA2019-6, while “the 2024 Rule remains in effect for purposes of private litigation”. The bulletin reproduces the July 2008 fact sheet, which is the source of the seven Supreme Court factors, the “economic reality” rather than “technical concepts” sentence, and the statement that the relationship “is not determined by the common law standards relating to master and servant”.
• Wage and Hour Division, notice of proposed rulemaking, RIN 1235-AA46 — published 26 February 2026, docket WHD-2026-0001, proposing to rescind the 2024 rule. No final rule as of 2 October 2026.
• Schedule SE (Form 1040), Self-Employment Tax — line 4a’s 92.35% multiplier, the $400 floor on line 4c, the wage-base ceiling on line 7 and its reduction by W-2 wages on line 9, the 12.4% and 2.9% rates on lines 10 and 11, and the 50% deduction on line 13. The latest published revision is the 2025 form, so the mechanics come from it and the 2026 dollar ceiling from Publication 15.
• IRS, Self-employment tax (Social Security and Medicare taxes) — the 15.3% total split 12.4% / 2.9%, the $400 filing threshold, that the half-SE deduction “only affects your income tax”, and that “Wage earners cannot deduct Social Security and Medicare taxes.” Note that this page still carries a 2024 wage-base figure of $168,600, labelled as such; the 2026 figure used here is the $184,500 from Publication 15.
• IRS Publication 15 (Circular E), Employer’s Tax Guide, 2026 — the 6.2% and 1.45% employee rates and the $184,500 Social Security wage base used on both sides of the comparison.
• IRS Topic no. 560, Additional Medicare Tax — the 0.9% rate, the taxpayer thresholds of $250,000 / $125,000 / $200,000, and the employer’s $200,000 withholding trigger that ignores filing status.
• IRS, Estimated taxes — the $1,000 expected-liability threshold, that estimated tax covers self-employment tax as well as income tax, and the 90%-of-current-year or 100%-of-prior-year safe harbour.
• Revenue Procedure 2025-32 — the 2026 bracket thresholds for every filing status, including the head-of-household 32% band at $201,750, which the newsroom summary does not publish.

Part of the PaystubKit tools collection. Calculations run locally in your browser. Estimates only, not tax, payroll or legal advice; worker classification in particular is a legal question and this page is not a determination.