Compensation Structure
W-2 vs. 1099 vs. S-Corp
The same work, offered as a job, a contract, or through your own company: which one leaves you with more money?
Three ways to be paid for the same work, compared after tax, after compliance cost, and after the hours each one actually costs you.
What this calculator answers, what you need, and what to do with the result
Have this in front of you
- The offer letter: salary, bonus, and what the employer puts toward health cover and retirement.
- The contract rate, and the hours a week you can honestly bill after admin and bench time.
- Quotes for running a company: filing, payroll, bookkeeping, and what health cover costs you alone.
Words on this page, in plain English
- SE tax
- Self-employment tax, 15.3%. An employer normally pays half of your Social Security and Medicare; a contractor pays both halves.
- S-Corp
- A company structure where you pay yourself a salary and take the rest as a distribution, which skips payroll tax.
- QBI deduction
- A deduction for business income, worth up to 20% of it, that can swing the answer toward contracting.
What to do with the answer
- 01Before choosing the S-Corp, ask an accountant what a defensible salary is for your role. An aggressive split invites the payroll-tax bill later.
- 02Add the unpaid hours to the contractor side: bench weeks, invoicing, and the time you spend chasing clients.
- 03Compare the three on take-home per hour worked, not on headline revenue.
W-2 Salary vs. 1099 / S-Corp Net Yield Engine
2026 IRS statutory model factoring SE tax arbitrage, Solo 401(k) circular caps, QBI pass-through, and bench drag.
S-Corp vs. W-2 over 36 mos
Min rate to equal $164,616 net W-2
S-Corp FICA savings beat CPA drag
Of gross 1099 lost to taxes, health & ops
1. W-2 Baseline Package
2. Independent Consulting & Friction
3. S-Corp & Tax Shelter Tuning
| Line Item (Annual) | W-2 Employee | 1099 Sole Prop | 1099 S-Corp |
|---|---|---|---|
| Gross Inflow + Match | $237,200 | $231,000 | $231,000 |
| Health Ins, Ops & CPA Overhead | $0 (Employer Paid) | -$15,600 | -$18,600 |
| FICA / Self-Employment Tax | -$15,044 | -$28,974 | -$15,705 |
| Pre-Tax 401(k) Sheltered | $31,700 | $61,703 | $49,475 |
| Sec. 199A QBI Tax Deduction | $0 | $27,842 | $15,893 |
| Income Tax (28% Eff.) | -$57,540 | -$31,183 | -$38,912 |
| Total Net Economic Yield | $164,616 | $155,243 | $157,784 |
| True Net Hourly Yield (incl. Commute/Admin) | $76.21/hr(2160 hrs/yr) | $88.21/hr(1760 hrs/yr) | $89.65/hr(1760 hrs/yr) |
Sensitivity Driver: Why S-Corp vs. Sole Prop Flips
Lowering your S-Corp W-2 salary saves 15.3% FICA below the $184,500 Social Security cap (and 2.9%–3.8% Medicare above it), but simultaneously shrinks your 25% Employer Solo 401(k) ceiling and QBI base. Use the S-Corp Reasonable Salary slider on the left to find the exact inflection point for your billing rate.
Method
How this number is calculated
- 01
W-2 take-home
Base, bonus and equity, plus the employer match, minus payroll tax and income tax at your effective rate, with retirement shelter counted separately because it is deferred rather than spent.
- 02
Sole proprietor
Billable hours across the remaining weeks produce gross revenue. Operating costs, insurance and half of self-employment tax are deducted before income tax, and the QBI deduction applies where eligible.
- 03
S-corp
The same revenue, split into a salary and a distribution. Payroll tax is charged on the salary at both the employee and employer rate, the employer retirement contribution is computed from the salary, and the compliance cost is subtracted.
- 04
Compare net, then hours
Each structure ends at a take-home figure. Divide by the hours each one really costs, including commute and unbillable admin, before deciding that the largest number is the best arrangement.
Federal treatment only; state payroll and income tax are folded into the effective rate you enter. Assumes steady billable weeks, no client concentration risk and no unpaid invoices.
Worked numbers
Pre-computed scenarios
A 240,000 W-2 package with 4% match and 20 days off, against 32 billable hours a week after 4 weeks of vacation and 4 weeks of bench, 6,000 of operating costs, 9,000 of health insurance and a 3,000 S-corp compliance cost. Only the hourly rate changes.
| Scenario | Inputs | Outcome |
|---|---|---|
| Low contract rate | $100/hr · 32 billable hrs/wk · 4 wks off · 4 wks bench | W-2 $171,581 | sole prop $90,710 | S-corp $93,769 — W-2 leads by $77,812 over S-corp |
| Rate matches the package | $125/hr · 32 billable hrs/wk · 4 wks off · 4 wks bench | W-2 $171,581 | sole prop $115,074 | S-corp $118,932 — W-2 leads by $52,649 over S-corp |
| Premium contract rate | $150/hr · 32 billable hrs/wk · 4 wks off · 4 wks bench | W-2 $171,581 | sole prop $140,003 | S-corp $144,095 — W-2 leads by $27,486 over S-corp |
Questions
What people ask before trusting this number
Why is the contract revenue lower than the W-2 package?
Because billable hours are not paid hours. The model bills the weekly billable hours across the working weeks left after vacation and bench time, then subtracts operating costs and health insurance. A 125 dollar rate at 32 billable hours does not produce 250,000 of revenue once those weeks are removed.
What does the S-corp election actually change?
It splits the profit into a salary and a distribution, so payroll tax applies to the salary rather than the whole profit. The model also charges the compliance cost and the employer share of payroll tax, because both are real. The gain is the payroll tax avoided on the distribution; the risk is a salary the IRS considers unreasonably low.
Is the employer 401(k) contribution counted for the S-corp?
Yes, and it is computed on the salary rather than the profit, which is why electing a low salary to save payroll tax also cuts the employer contribution. The model runs both effects together instead of letting you optimise one in isolation.
Why does the W-2 side count commute hours?
Because the comparison is about the value of an hour of your life, not only the tax bill. Commute time and paid time off are real differences between the two arrangements, and the yield per hour is only meaningful if the hours denominator includes them.
What is left out?
Client concentration risk, payment delays, the cost of chasing work, and the loss of unemployment insurance. It also assumes steady billable weeks, which is the assumption most contractors overstate. Drop the billable weeks until the two options are level, and that is your real risk buffer.
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