You see a contract role for $100 an hour. You grab your calculator. "$100 times 2080 hours... that's $208,000! I'm rich!"
No, you're not. You're about to be audited by reality.
Most developers treat contracting like a salaried job with a higher number. They forget that "Contractor" is just a fancy word for "Small Business Owner who sucks at accounting." By the time you pay the IRS, buy your own health insurance, and cover the weeks you aren't working, that $208k looks a lot more like $140k.
If you want to know how to actually make $200k, read our guide on high-paying professions. But first, let's destroy the illusion that hourly rate equals salary.
The Scenario
You are a Senior Dev making $160,000 a year with benefits. You are bored. A recruiter hits you up with a 12-month contract for $100/hour. You do the napkin math and see a $48,000 raise. You quit your job, sign the contract, and buy a Tesla.
April 15th arrives. You realize you owe the IRS an extra $15,000 in self-employment tax. Your health insurance premium just jumped to $1,200 a month. And then the contract ends two weeks early, leaving you with a month of unpaid "bench time." Suddenly, you are making less than you did at your boring corporate job, but with 100% more stress.
The Old Way vs. The New Way
The old way of comparing jobs was looking at the gross number. The new way is looking at the "Net Lifestyle Value."
| Feature | The Old Way (W2 Mindset) | The New Way (1099 Mindset) |
|---|---|---|
| Math | Hourly Rate x 2080 hours. | Hourly Rate x 1800 hours (Billable). |
| Taxes | "My employer handles that." | "I am the employer and I hate it." |
| Benefits | "I have dental." | "I pay $2k/month for a high deductible plan." |
| Job Security | PIPs and severance packages. | "Don't come in Monday." |
| Retirement | 4% Match. | Solo 401k (The only real perk). |
1. Calculate the "Self-Employment Tax" Hit
This is the one that hurts the most. When you are an employee, your company pays half your FICA taxes (Social Security & Medicare). When you are a contractor, you pay both halves.
That is an extra 7.65% tax right off the top. On $200,000, that is over $15,000 gone. Poof. Just for the privilege of being your own boss.
2. Factor in the "Bench Time"
No contractor works 52 weeks a year. You will get sick. You will want a vacation. The contract will end and it will take you 3 weeks to find a new one.
If you don't bill, you don't eat.
Successful contractors budget for 4-5 weeks of unpaid time per year. That means you aren't multiplying your rate by 2080 hours. You are multiplying it by 1880 hours. That $100/hr just dropped to $188,000 gross before you even paid a dime in taxes.
3. The Health Insurance Reality Check
Corporate health insurance is heavily subsidized. You might pay $200/month, but the company pays $1,000.
As a contractor, you pay the full sticker price. For a family, that can easily be $25,000 a year for a plan that isn't even that good. If you are single, maybe it's $6,000. Either way, it is a massive line item that comes directly out of your net profit.
4. The "Solo 401k" Silver Lining
It's not all bad. The one massive advantage of contracting is the Solo 401k.
As an employee, you can put in ~$23k. As a contractor, you can put in up to $69,000 (depending on income) because you can contribute as both the employee and the employer. This is the only way contracting makes financial sense: if you use it to aggressively lower your taxable income.
5. Set Your "Walk Away" Rate
Do not accept a contract rate that is just "salary / 2000." You need a premium to cover the risk and the taxes.
The rule of thumb: Contract Rate should be at least 1.3x to 1.5x your Salaried Hourly Equivalent.
If you make $80/hr ($160k) as an employee, you shouldn't take a contract for less than $110/hr. Anything less, and you are taking a pay cut with more risk.
The Real Numbers
Let's look at the actual take-home difference between a $160k Salary and a $100/hr Contract ($200k Gross).
| Expense Category | Full-Time ($160k) | Contractor ($100/hr) |
|---|---|---|
| Gross Income | $160,000 | $200,000 |
| Self-Employment Tax | $0 (Employer pays) | -$15,300 (You pay extra) |
| Health Insurance | -$2,400 (Subsidized) | -$12,000 (Out of pocket) |
| Unpaid Time Off | $0 (Paid Vacation) | -$16,000 (4 weeks unpaid) |
| 401k Match | +$6,400 (Free money) | $0 (You fund it) |
| Tech/Liability Ins. | $0 (Provided) | -$2,500 (Your cost) |
| Real Net Value | $164,000 | $154,200 |
The "higher" contract rate actually puts $10,000 less in your pocket when you factor in the value of benefits and taxes.
Frequently Asked Questions
Q: Can I write off my home office? A: Maybe. The IRS rules are strict. It must be a dedicated space used exclusively for work. Your dining room table doesn't count. If you qualify, it's a nice deduction, but it won't make you rich. It might save you a couple thousand dollars in taxes, which barely covers your liability insurance.
Q: What is a C2C (Corp-to-Corp) vs. W2 Contract? A: W2 Contract means you are employed by a staffing agency. They take out taxes and might offer crappy benefits. C2C means you have your own LLC. C2C is better for tax write-offs and Solo 401k, but requires more paperwork. If you are serious about contracting, go C2C (LLC).
Q: Is contracting better for job security? A: No. It is worse. You are the first to be cut when budgets get tight. However, because you are used to finding work constantly, you might be more resilient than a long-term employee who hasn't interviewed in 10 years. Security is a myth; adaptability is reality.
Q: Should I use an umbrella company? A: Only if you are lazy and hate money. Umbrella companies take a cut of your hourly rate to handle payroll and taxes. Unless you absolutely cannot figure out how to open a bank account and pay estimated taxes, do it yourself or hire a CPA. The fees aren't worth it.