Moving from a salary to 1099 contracting puts one question in front of you on day one: what should I charge? Divide your old salary by 2,080 hours and you will almost certainly undercharge, because that shortcut ignores the costs an employer used to pick up and the hours you won't be able to bill.
I'm Hassan Raza, a software developer based in Pakistan, and I write the guides on UScareer Path. This post gives you a breakeven formula you can fill in with your own numbers, a worked example, a market check against government wage data, and a way to raise your rate over time. If you're still deciding between a W-2 job and a contract, start with W-2 vs 1099: how to compare contract and full-time pay; this page covers only the rate. The tax mechanics here describe US workers, so if you're a nonresident working for US clients, check the IRS page on nonresident aliens or ask a tax professional.
Estimate disclaimer: The figures below are illustrations. Your costs, taxes and billable hours will differ. This isn't tax or financial advice.
The Breakeven Formula
Your minimum hourly rate is the total amount you need to earn in a year divided by the hours you can realistically bill:
Minimum rate = (Target income + Benefits you'll replace + Extra self-employment tax + Business expenses) ÷ Billable hours
Then add a margin for risk and gaps between clients. Each piece of that formula is simpler than it looks.
1. Target Income
Start with the salary you'd want if you were a W-2 employee doing the same work. Our salary negotiation guide explains how to research a market salary, and the market-check section below shows how to use BLS data.
2. Benefits You'll Replace
As a contractor, you pay for things an employer often covers or subsidizes:
- Health insurance premiums and out-of-pocket costs
- Retirement contributions that replace an employer 401(k) match (our 401(k) match explained guide shows how to value one)
- Paid time off, holidays and sick days (handled through billable hours below)
- Disability or life insurance, if you want them
Give each one a dollar figure. Real quotes beat guesses where you can get them, such as Marketplace health plan prices for your area.
3. Extra Self-Employment Tax
Employees and employers each pay half of Social Security and Medicare. As a self-employed person, you pay both halves through self-employment tax. The IRS explains how it's calculated (15.3% in total), and our W-2 vs 1099 guide walks through it. For rate setting, the key point is simple: budget for the employer half that you now pay yourself. As a rough planning figure, that's about 7.65% of your target income: 6.2% for Social Security, which stops at the 2026 wage base of $184,500, and 1.45% for Medicare, which has no cap. The IRS applies self-employment tax to 92.35% of your net earnings, and you can deduct half of it, so this rough estimate errs a little high.
Remember that nothing is withheld from 1099 pay. The IRS says self-employed people generally need to make quarterly estimated tax payments if they expect to owe $1,000 or more for the year. Set aside part of every payment.
4. Business Expenses
Write down what it'll cost to run your contracting business, for example:
- Equipment and software
- Internet and phone (the business share)
- Professional liability insurance
- Accounting or tax preparation
- Licenses, certifications and training
- Office space or coworking
The IRS self-employed resources and Publication 334 explain which ordinary and necessary business expenses are generally deductible. Deductibility lowers your tax, but you still have to cover the cost, so include it here.
5. Billable Hours
This is where most new contractors go wrong. Start from 2,080 hours (40 hours × 52 weeks) and subtract:
- Vacation: e.g., 3 weeks = 120 hours
- Holidays: e.g., 10 days = 80 hours
- Sick days: e.g., 5 days = 40 hours
That leaves 1,840 available hours. But not every available hour is billable. You'll spend time on invoicing, finding clients, proposals, admin and learning. If 75% of your available time is billable, you'll bill 1,380 hours a year.
Worked Example
Say you're a data analyst who'd target a $90,000 W-2 salary. Here's an illustration:
| Item | Annual amount |
|---|---|
| Target income | $90,000 |
| Benefits to replace (health insurance, retirement contribution) | $12,000 |
| Extra self-employment tax (planning figure: employer half, approx. 7.65% × $90,000) | $6,900 |
| Business expenses | $6,000 |
| Total needed | $114,900 |
| Billable hours (1,840 available × 75%) | 1,380 |
| Breakeven rate | ≈ $83/hour |
Add a Margin
Breakeven means you earn what you'd earn as an employee, with more risk. Most contractors add a margin for:
- Gaps between contracts
- Late or unpaid invoices
- Rate pressure in negotiations
Adding a 10% margin to the total needed gives about $92/hour. You might quote $90–$95/hour, depending on the market.
(All figures are illustrative. Use your own numbers.)
Quick Sensitivity Check
Small changes in billable hours swing the rate a lot:
| Billable share | Billable hours | Breakeven rate (on $114,900) |
|---|---|---|
| 85% | 1,564 | ≈ $73 |
| 75% | 1,380 | ≈ $83 |
| 65% | 1,196 | ≈ $96 |
If you're new and still building a client list, plan for a lower billable share.
Market-Check Your Rate With BLS Data
The formula sets your floor. The market sets the ceiling. One official benchmark is the Bureau of Labor Statistics Occupational Employment and Wage Statistics (OEWS) program, which publishes employment and wage estimates for approximately 830 occupations, covering the nation, states and approximately 530 metropolitan and nonmetropolitan areas, including the 10th, 25th, median, 75th and 90th percentiles.
Using it takes three steps:
- Find your occupation in OEWS and look up the hourly wage percentiles for your state or metro area.
- Treat those as employee wages, since OEWS measures wage and salary workers, not independent contractors.
- Compare: your contractor rate should usually sit well above the employee hourly wage for similar work, because of the costs in the formula above.
Example: if the OEWS 75th percentile hourly wage for your occupation in your area were $50, a contractor rate of $83–$95 would reflect the added costs and risk, not overcharging. (This $50 figure is illustrative. Look up your own occupation.)
Then look at what clients actually pay: posted contract rates for similar roles, rates from staffing agencies, and what peers charge.
Hourly, Daily or Project Pricing?
Your formula works for any pricing model:
- Hourly: simplest, and common for staff-augmentation contracts.
- Daily: multiply your hourly rate by your typical billable hours per day.
- Project: estimate hours, multiply by your rate, then add a buffer for scope risk. Define the scope in writing.
Negotiating Rate Increases
Once you're established, revisit your rate on a regular schedule.
- Review your numbers annually. If your costs rise (health insurance, software), your breakeven rate rises too.
- Raise rates for new clients first. It's easier than renegotiating existing work.
- Tie increases to value or scope. "Since the project now includes the reporting pipeline, my rate for the new scope is $X."
- Give notice. For ongoing clients, give advance notice before a new rate takes effect, and put it in writing.
Here's a message to adapt:
"Hi [Name], I've enjoyed working on [project]. Starting [date], my hourly rate for new work will be $[X], reflecting [expanded scope / updated costs]. Current commitments will stay at the existing rate through [date]. Happy to discuss."
Common Mistakes
- Dividing a salary by 2,080. It ignores taxes, benefits, expenses and unbilled time.
- Forgetting estimated taxes. Set money aside from every payment.
- Assuming 100% billable time.
- Pricing only against other contractors' lowest rates.
- Never raising rates.
Frequently Asked Questions
How do I calculate my 1099 hourly rate from a salary?
Add your target salary, benefits you'll replace, the employer half of Social Security and Medicare that you'll now pay, and business expenses. Divide by your realistic billable hours, then add a margin.
How many billable hours should I assume?
Start with 2,080, subtract time off, then apply a billable share for admin and business development. Many new contractors plan conservatively.
Is a 1099 rate always higher than an employee's hourly wage?
It usually should be, because contractors cover their own taxes, benefits and expenses, and they aren't paid for time off.
Do I need to pay quarterly taxes as a contractor?
Generally yes, if you expect to owe $1,000 or more for the year, according to the IRS.
Should I quote hourly or by project?
Either can work. Use your hourly rate as the base, and add a buffer to project quotes for scope risk.
The Short Version
Your floor is the total you need to earn in a year divided by the hours you can realistically bill, plus a margin for gaps, late invoices and rate pressure. The market sets your ceiling, so check both before you quote. Then revisit the number once a year, and raise rates for new clients first.
To test your own numbers, the free W-2 vs 1099 calculator shows a breakeven contract rate next to a salary offer. If you find an error in the figures or sources, email hassan@myuscareerpath.com.
This article was originally published on UScareer Path.
Sources
- Internal Revenue Service, "Self-employment tax (Social Security and Medicare taxes)": https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
- Internal Revenue Service, "Estimated taxes": https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
- Internal Revenue Service, "Self-employed individuals tax center": https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center
- Internal Revenue Service, Publication 334, Tax Guide for Small Business: https://www.irs.gov/publications/p334
- Internal Revenue Service, Topic No. 751, Social Security and Medicare withholding rates: https://www.irs.gov/taxtopics/tc751
- U.S. Bureau of Labor Statistics, Occupational Employment and Wage Statistics: https://www.bls.gov/oes/
- U.S. Bureau of Labor Statistics, "How much could I be earning? Using OEWS data during salary negotiations": https://www.bls.gov/oes/earnings.htm
- U.S. Bureau of Labor Statistics, "Occupational Employment and Wage Statistics Overview": https://www.bls.gov/oes/oes_emp.htm
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