Finance & AccountingFree
Contractor vs Employee Cost Comparison
Both routes priced to the dollar, and the reclassification exposure the invoice route carries, computed from what you have already paid out.
A contractor at 95 dollars an hour and an employee at 155,000 a year are not comparable numbers, and the usual fix makes them worse. Adding a flat thirty percent to the salary gets the burden roughly right and the decision entirely wrong, because it prices only one of the two things that separate the options. The other is the bill that arrives if the arrangement is reclassified, and that one is calculated on every dollar you have already paid.
This prices both routes on the same basis, then prices the exposure. Under section 3509 the reduced rate is 10.68 percent of everything paid when the required Forms 1099 went out, and 13.71 percent when they did not, per IRS Publication 15. Those two rates sit three points apart, so a filing you either made or missed moves the number by three percent of the whole relationship. That is why the intake asks which 1099s were filed, and for which years.
The evidence for the exposure is already sitting in the cost comparison. The laptop you supply, the software seats you pay for, and the three hours a week your manager spends directing the work are all real costs on the invoice route, and all three are also control facts. Each line lands twice: once in the cost total, once in the classification file. If the answer turns out to be conversion, the 941 reconciliation and the payroll accrual both change.
The exposure compounds while the saving does not
Cordwell Instrument, a fictional 34-person controls integrator, has paid one programmer on invoice for three years: 476,800 dollars across FY2024, FY2025 and FY2026. Fully loaded, FY2026 on the invoice route cost 196,234, against 207,347.50 for the same person salaried at 155,000 with health cover, a four percent match and the statutory burden. The invoice route is 11,113.50 cheaper, 5.4 percent. Per delivered hour it is 106.07 against 110.29, because a salaried year delivers 1,880 hours after leave and holidays, not 2,080.
Now the other side. Cordwell filed its 1099s, so the reduced section 3509 rate applies: 10.68 percent of 476,800 is 50,922.24, and Cordwell may not recover the worker's share from the worker. Three years of saving at FY2026 rates comes to 33,340.50. The exposure accrued 1.53 times faster than the saving, so the arrangement only paid off if the chance of reclassification stayed under 65.5 percent. Had those 1099s been missed, the rate is 13.71 percent and the bill is 65,369.28.
The same filings open a cheaper door. The Voluntary Classification Settlement Program charges ten percent of the reduced-rate liability on the most recent year alone, and requires that every Form 1099 was filed for the three preceding years. For Cordwell that is 1,877.01 against a 50,922.24 audit exposure, so the fix costs 3.7 percent of the problem. Miss the 1099s and both doors shut at once: the higher rate applies and the program is closed to you.
How it works
Add the invoices
Every invoice from the worker, across as many years as the arrangement has been running.
Add the payroll side
The payroll register or the offer you would make, plus the benefit invoices per head.
Describe the arrangement
Who sets the hours, who supplies the tools, how the work gets directed, which 1099s went out.
Read both totals
The cost sheet, the exposure at your filing rate, and the settlement price if you convert.
What you get
- Both routes priced per delivered hour, so the salary and the invoice finally compare
- Section 3509 exposure computed on the payments already made, at your own filing rate
- The break-even reclassification probability, above which the cheaper route is the dearer one
- Every control fact in the arrangement, sorted into the three categories the IRS uses
- The settlement-program price on these workers, and whether your filings still qualify
- A sheet you can hand an adviser, with every rate and every source named
Common questions
Is the contractor actually cheaper once everything is counted?
On the invoice route Cordwell paid 196,234 in FY2026 against 207,347.50 for the salaried equivalent, so yes, by 11,113.50. The comparison only holds because the manager time and the company-supplied tooling are counted on both sides. Strip those out of the contractor column, as most calculators do, and the gap doubles for no reason. The salaried column's own burden comes from actual invoices too; see fully-loaded cost and utilization.
Why is the exposure 10.68 percent rather than the full payroll tax?
Section 3509 cuts the employee half. Publication 15 puts the reduced figures at 7.44 percent for social security, 1.74 percent for Medicare and 1.5 percent for income tax withholding, which is 10.68 percent in total. Your own employer share stays whole inside those rates, and the relief is unavailable if the withholding was disregarded on purpose.
Does one missing 1099 really move the number that much?
It moves it twice. The rate steps up to 13.71 percent, which on Cordwell's three years is 14,447.04 more. It also closes the settlement program, because eligibility turns on having filed every Form 1099 for the three preceding years. The cheap fix and the reduced rate depend on the same filing, so missing it costs both at once.
How do you tell which side of the classification line the work sits on?
Publication 15-A sorts the evidence into behavioural control, financial control and the type of relationship, and the facts you entered for the cost comparison already populate all three. Who supplies the laptop is financial control. Three hours a week of direction is behavioural. An open-ended engagement on core work goes to relationship.
We would rather just convert the person. What does that path cost?
Form 8952 prices it at ten percent of the reduced-rate liability on the most recent year, which came to 1,877.01 for Cordwell, with no interest or penalties and no classification audit of the earlier years. The programme is prospective and wants roughly 120 days of lead time, so the 941 reconciliation follows it rather than precedes it. The first register after conversion is worth a field-level diff.
Is this a legal opinion on our arrangement?
No. It is a priced comparison and an evidence file, built so an adviser can disagree with a specific line instead of the whole conclusion. Every rate is sourced to an IRS document and every dollar traces to an invoice you supplied. If the question has already arrived in writing, answering the notice comes first.
Does this cover owners paid on invoice, or state law?
Owner payments are a different question with the same shape, and reviewing owner draws is where that starts. State tests and wage-hour exposure are separate from the federal employment tax question priced here, and heavier in several states, so the sheet flags where a state review is warranted. Premium on the workers compensation policy moves most, because it turns on the class code each person sits in.
Contractor vs Employee Cost Comparison
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