Hourly to salary math, and the 1099 trap
A friend of mine took a $90/hour 1099 contract in 2022 and turned down a $150k W-2 offer to do it. "It's 187k annualized, how is that not better?" he texted me. I asked if he'd done the SE tax math. He hadn't. We did it on the phone. By the time we finished, his 1099 rate was closer to $135k-equivalent W-2, and that's before he thought about benefits, PTO, and 401(k) match.
He took the 1099 anyway for other reasons (flexibility, the project was interesting), but at least he went in with eyes open. Most people don't.
Here's the full math on converting between hourly, salary, and 1099.
The simple case: hourly to annual salary
If you work 40 hours a week all year, every week:
annual_gross = hourly_rate × 40 × 52 = hourly_rate × 2,080
So $25/hour = $52,000/year. $35/hour = $72,800/year. $50/hour = $104,000/year.
That's the baseline. In the pay raise calculator, flip the salary-type toggle to Hourly and it handles this automatically.
Where the simple case breaks
Nobody actually works 2,080 hours. Here are the usual adjustments.
Paid time off. Two weeks PTO means you're paid for 80 hours you don't work. For salaried folks this is baked into the number. For hourly, you're either paid for those hours (equivalent to 2,080) or you're not (effective 2,000).
Holidays. Most employers give 6-10 paid holidays. Another 48 to 80 hours.
Sick leave. 5-10 days typically. 40 to 80 hours.
Overtime. Under the Fair Labor Standards Act, non-exempt hourly workers get 1.5x their rate above 40 hours/week. If you reliably work 45 hours, your effective annualization is (40 × 52) + (5 × 52 × 1.5) = 2,080 + 390 = 2,470 equivalent hours at straight time. At $25/hour that's $61,750 instead of $52,000. Overtime is often the biggest hidden win in blue-collar and trades work.
Shift differentials. Night shift, weekend, hazard pay. Depends on industry and contract.
The salary version of the same job
If your employer offers you a salary conversion from your hourly role, the number they calculate is almost always 2,080 × rate. Which means you lose the overtime premium. If you were earning $61,750 equivalent including overtime, a "conversion" to $52,000 salary is a pay cut, and it's a particularly sneaky one because the headline number is the same.
When my brother-in-law's shop floor went from hourly to salaried in 2020, he dropped $8,400 a year in take-home because his OT disappeared. HR called it "increased job security." He called it a pay cut. Both were right.
1099 vs W-2, the FICA gap
This is where most people get in trouble.
When you're W-2, FICA is 7.65% of your wages (6.2% Social Security up to the $184,500 2026 wage base, plus 1.45% Medicare uncapped). Your employer pays a matching 7.65%, which you never see on your paycheck but which is real compensation in the sense that it funds your future Social Security benefit.
When you're 1099 (independent contractor), you pay both halves. It's called self-employment tax and it's 15.3% of net earnings up to the wage base, plus 2.9% uncapped above it. Your 1099 is taxed at 15.3% of FICA-eligible earnings vs 7.65% for W-2.
You do get to deduct half of the SE tax from AGI (it's an above-the-line deduction), which softens the blow somewhat. But the bottom-line difference is meaningful: roughly 6 to 8% more of your 1099 dollars go to tax compared to the same gross on W-2.
IRS Topic 554 and Self-Employment Tax Reference have the gory details.
Converting a 1099 rate to W-2 equivalent
My friend's $90/hour 1099 at 2,080 hours = $187,200 gross. But:
- Self-employment tax: ~$21,000 (vs about $12,600 FICA on W-2 at same gross). Gap: +$8,400.
- No employer health insurance: $12,000 to $18,000/year out of pocket for a family plan (vs employer subsidy averaging 70 to 80%). Say +$12,000.
- No 401(k) match: lose 3 to 6% of salary in forgone match. Say 4% × $187k = +$7,500 (he could contribute to a SEP-IRA but the match is gone).
- No PTO: 3 weeks PTO at a W-2 job is worth ~$10,800 of paid time at the $187k rate.
- No short-term disability, life insurance, unemployment insurance eligibility: say +$2,000.
- Administrative overhead (quarterly estimated taxes, CPA fees, bookkeeping): -$2,000 to -$4,000 in time and actual cost.
Rough W-2 equivalent: $187,200 - $42,000 in gaps = about $145k. Which is almost exactly the $150k W-2 he turned down.
Rule of thumb that's held up for me over the years:
1099 rates need to be 25 to 35% higher than comparable W-2 to break even. Below that and you're subsidizing the client with your benefits and tax overhead.
When 1099 is actually worth it
Three scenarios where I've seen it work.
First, when the 1099 rate is genuinely 40%+ above the W-2 market. High-end consulting, specialty engineering, anesthesiology locums. The rate premium covers the cost.
Second, when flexibility has direct financial value. A friend who's a freelance video editor takes 60% of a full-time salary to work 25 hours a week and run her own business on the side. The math works because she's maximizing revenue across two income streams, not trying to replace a single job.
Third, when the W-2 option is genuinely worse (toxic boss, no growth path, declining company). The 1099 is the escape hatch, not the optimization.
Run both scenarios through the calculator. For 1099, add 15.3% SE tax instead of 7.65% FICA by treating the gross 25 to 35% higher.
Gig work is its own thing
If you're comparing a W-2 role to gig work (Uber, DoorDash, Instacart, Fiverr), add another layer. Gig platforms 1099 you, which means SE tax. They also don't pay for downtime, vehicle expenses, or gas. Effective hourly after expenses is often 40 to 50% below the headline.
The BLS contingent workforce data has the best national numbers if you want to benchmark.
Takeaways
- Hourly to annual: multiply by 2,080, adjust for overtime.
- Overtime at 1.5x above 40 is often the hidden win in hourly roles. Don't convert to salary without running the overtime math.
- 1099 rates need to be 25 to 35% higher than W-2 to break even on FICA, benefits, PTO, and admin.
- Benefits are not optional compensation. Price them before you compare offers.
- Gig work is 1099 plus no PTO plus vehicle/equipment costs. Run the net.
See bonus vs raise for another income-type tradeoff, and bracket creep explained for what the tax hit looks like on higher incomes. The guide has the full formula.