Is a 1099 contractor cheaper than a W-2 employee?

On payroll taxes alone, yes: you pay no employer FICA, no FUTA, no state unemployment insurance and usually no workers' compensation on a genuine contractor. On a electrician at the median wage the known employer taxes add 7.72% on top of the wage, about $4,876 a year, before state costs that vary. But a contractor's rate has to carry their own self-employment tax at 15.3%, their own insurance and their own unpaid time off, so a genuine contract rate sits above the employee wage. The saving is smaller than the tax line suggests.

Can I just call someone a subcontractor?

No. The IRS applies common law rules across three categories: behavioral control, financial control and the type of relationship. It states there is no "magic" or set number of factors that makes the determination and no one factor stands alone. The label on the contract does not decide it; how the work actually runs does.

What happens if I get it wrong?

The IRS says an employer who misclassifies without a reasonable basis "may be held liable for employment taxes for that worker". There is relief where the business had a reasonable basis and filed all required federal information returns consistently with how it treated the worker. That relief depends on the consistency, which is why the paperwork matters even when you are confident.

How do I get a definitive answer?

File Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Either the business or the worker can file it. The IRS notes it may take at least six months to receive a determination, so it is a way to settle an arrangement you intend to keep rather than a way to decide next week’s hire.

// W-2 VS 1099

Employee or subcontractor, what each costs

The cost comparison is the easy half. The half that catches people out is that you do not actually get to choose which one you have, and the IRS decides on how the work runs rather than what the contract says.

On a electrician at the median wage, the employer taxes you can put a national number on add 7.72% on top of the wage, taking $30.38 an hour to $32.72. State unemployment insurance and workers' compensation sit on top of that and vary too much to publish. A genuine 1099 rate avoids all of it, and is higher for exactly that reason.

// THE W-2 SIDE

What an employee really costs

Worked on a electrician at the BLS median wage, over a 2,080-hour year. The first three lines are national published rates. The rest are real costs with no national figure, and this page will not invent one.

Wage $63,190 $30.38 an hour. BLS May 2025 median
Employer FICA at 7.65% +$4,834 Social Security 6.2% plus Medicare 1.45%, published by the IRS
FUTA, net of the state credit +$42 6.0% on the first $7,000 of wages, with a credit of up to 5.4%, so 0.6% where the full credit applies
Known employer cost $68,066 $32.72 an hour, 7.72% above the wage
State unemployment insurance varies Rate and wage base are set by each state, and your rate moves with your claims history
Workers' compensation varies By state and by trade classification. On a hazardous trade it can be the largest single line after the wage
Paid time off and benefits your policy No federal mandate for paid leave, so this is whatever you offer, and it is paid hours that do not bill

// THE 1099 SIDE

What a subcontractor costs

Simpler to state and easy to misread. You pay the invoice. No employer FICA, no FUTA, no state unemployment insurance, and usually no workers' compensation, though some states require cover for uninsured subcontractors, so check yours.

Why their rate is higher, and should be. A self-employed person pays self-employment tax at 15.3% on net earnings: Social Security at 12.4% and Medicare at 2.9%. That is both halves. The 0.00% an employer would have covered comes out of their rate instead, along with their own liability insurance, their own tools, and every hour they take off unpaid. A contractor charging the same number as an employee's wage is quietly taking a pay cut, and usually does not last.

They can deduct the employer-equivalent half of that self-employment tax when figuring adjusted gross income, which softens it but does not remove it.

// SIDE BY SIDE

A electrician, both ways

W-2 employee

Employer FICA7.65%
FUTA0.6% on first $7,000
State unemploymentvaries
Workers' compvaries
Paid time offyour policy
You direct the workyes
Available when you need themyes

1099 subcontractor

Employer FICAnone
FUTAnone
State unemploymentnone
Workers' compcheck your state
Paid time offnone
You direct the workno, and that is the point
Available when you need themonly if free

The last two rows are the ones that decide it in practice. If you need someone there on your schedule doing it your way, the arrangement is already an employment relationship whatever the invoice says.

// THE TEST THAT DECIDES

The IRS decides on the facts, not the label

Three categories of evidence, and the IRS is explicit that there is no "magic" or set number of factors that makes the determination, and no one factor stands alone.

Behavioral control

Does the company control or have the right to control what the worker does and how the worker does his or her job?

Set their hours, direct the method, require your training, tell them which van to take? That points to employee.

Financial control

Are the business aspects of the worker’s job controlled by the payer?

Who buys the tools, who carries the unreimbursed costs, can they profit or lose on the job, do they work for others? A real contractor runs a business.

Type of relationship

Are there written contracts or employee type benefits? Will the relationship continue and is the work performed a key aspect of the business?

Ongoing rather than project-based, and doing the thing your business exists to do, both point at employee whatever the paperwork says.

If you get it wrong. The IRS says an employer that misclassifies a worker without a reasonable basis may be held liable for employment taxes for that worker. Relief exists where there was a reasonable basis and the business filed all required federal information returns consistently with how it treated the worker, which is a reason to keep the paperwork straight even when you are confident.

If you want it settled. Form SS-8 asks the IRS to determine the status, and either side can file it. The IRS notes a determination may take at least six months, so it settles an arrangement you plan to keep rather than a decision you need this week.

// YOUR NUMBERS

Run it on your own wage and overhead

The figures above use a national median. Yours will differ, and the two lines this page cannot publish, unemployment insurance and workers' compensation, are exactly the ones your accountant or payroll provider can give you in a minute.

Charge-out rate calculator Electrician wages by state

// SOURCES

Where every figure comes from

Employer FICA at 7.65%, and self-employment tax at 15.3% IRS, Self-Employment Tax (Social Security and Medicare Taxes). Social Security 12.4% and Medicare 2.9% for the self-employed; 6.2% and 1.45% each side for employment.
FUTA at 6.0%, first $7,000, credit up to 5.4% IRS, Topic 759, Form 940 and federal unemployment tax.
The three-category common law test, Form SS-8, and the relief provision IRS, Independent Contractor (Self-Employed) or Employee. Quotations are from that page.
Median wage US Bureau of Labor Statistics, Occupational Employment and Wage Statistics (OEWS), May 2025, national. Retrieved 2026-08-26.
State unemployment insurance and workers' compensation Deliberately not quoted. Both are set at state level and workers' compensation also varies by trade classification, so no national figure would be true.

This is a cost explainer, not tax or legal advice. Worker classification turns on the facts of your arrangement, and the penalty for getting it wrong lands on the business. Talk to your accountant before you decide.

// READY WHEN YOU ARE

Either way, the work has to be there

Employee or subcontractor, another pair of hands only pays for itself if the jobs are booked. That is the part we build.

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