A 1099 contract paying your old W-2 salary is a pay cut. Here's the 30-50% markup rule, what it covers, and a worked example converting an $80k salary to a contract rate.
Short answer: to match a W-2 salary, a 1099 contractor typically needs to charge 30% to 50% more than the equivalent salary — 30% if you have benefits covered elsewhere (say, a spouse's health plan), closer to 50% if you're buying your own insurance and funding your own retirement. A contract that pays your old salary as an hourly-equivalent rate isn't a lateral move; it's a pay cut with extra paperwork.
The reason is that a salary was never your full compensation. Your employer paid taxes and bought benefits on top of it, invisibly. Go 1099 and every one of those costs lands on you — partially offset by new deductions you'll want to actually take, which is why our pillar on deductions self-employed people actually miss is required reading for anyone making this jump. Here's what shifts, the markup math, and a worked example at $80,000.
Stack those up and you get the standard advice: mark up the equivalent salary by 30% to 50%. Use the low end if benefits aren't your problem — you're on a spouse's health plan, or the engagement is long and stable with near-zero downtime. Use the high end if you're buying family health coverage, want real retirement savings, and expect gaps between contracts. Many consultants convert to an hourly rate with a simple shortcut: annual salary divided by 1,000 (roughly salary ÷ 2,000 hours × 2) — $80,000 becomes $80/hour. That shortcut bakes in roughly a 50% markup plus unbillable time, which is why it survives: it's the number at which contracting genuinely competes with employment.
Say you're leaving an $80,000 W-2 job with decent benefits. What does the contract need to pay?
Add the hard costs (~$16,000-$19,000) to the salary and you're near $97,000-$99,000; gross that up for unbilled time and you land around $107,000-$110,000 of annual billings — a 35-38% markup, right in the rule-of-thumb band. At 1,750 billable hours that's about $61-63/hour; with more downtime or family coverage, the $80/hour shortcut stops looking greedy and starts looking correct.
If the 1099 rate isn't at least 30% above the W-2 salary, you're the one funding the difference.
It's not all outflow. Contractors get deductions employees can't touch: the home office deduction, business mileage, equipment, software, professional fees, and above-the-line retirement and health premiums. On top of that sits the QBI deduction — a permanent 20% deduction on qualified business income, which for a contractor under the income thresholds means roughly a fifth of profit escapes income tax entirely. These offsets are real and can claw back a meaningful chunk of the extra tax load — but they reduce the gap, they don't erase it. Deductions require actual spending or actual recordkeeping, and QBI has income phase-outs and service-business rules. Price the contract on the full markup; treat the deductions as upside.
Once contracting income becomes substantial and steady, an S corp election can trim self-employment tax further — the point where that starts making sense is covered in our comparison of LLC vs S corp vs C corp in 2026.
The markup framework isn't just for deciding whether to accept — it's your negotiating script. When a client balks at $75/hour against your former $80,000 salary, walk them through the employer's side of the ledger: they're no longer paying payroll taxes, benefits, equipment, or idle time for you, and they can end the engagement without severance. A contractor at a 40% markup frequently still costs the company less than an employee at the base salary, once their fully loaded cost (often 1.25 to 1.4 times salary) is counted. Framing the rate as cost-neutral to them and survival-neutral to you turns a haggle into arithmetic. And put the number in writing before work starts — scope, rate, invoicing terms, and who pays expenses — because every ambiguity in a handshake deal resolves against the person waiting to be paid.
One caution before you sign: the 1099-versus-W-2 line isn't a checkbox the company gets to pick. If the business controls how, when, and where you work — set hours, their equipment, ongoing supervision like any employee — the law may consider you an employee regardless of what the contract says. Misclassification hurts workers (no unemployment, no comp, both halves of FICA) and creates real liability for the company. If a role walks and talks like a job but pays like a contract, that's exactly when the 30-50% markup matters most — and worth raising before you start, not at tax time.
Multiply the W-2 salary by 1.3 to 1.5 before comparing offers — that's the honest exchange rate between employment and contracting once taxes, benefits, and unbilled time are priced in. Then capture every deduction and the QBI break to keep as much of the markup as possible. Taxagon's tax planning team runs this salary-to-rate math and the S corp break-even for new contractors all the time — if you'd rather not navigate it alone, reach out.
This article is general information, not tax advice for your specific situation. Tax law changes; figures are for the years stated.
Talk it through with a licensed US tax professional — we'll tell you honestly whether it applies to your situation.
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