"What hourly rate matches my $120k salary?" Type that into Google. The first result divides 120,000 by 2080 (52 weeks × 40 hours) and tells you $57.69. That number is wrong by roughly half.
Self-employment tax is the biggest delta
On a W-2 job, your employer pays half of FICA (7.65%) and you pay the other half. As a 1099 contractor, you pay both halves: 15.3% on the first ~$168,600 of net earnings (2024 Social Security wage base), plus 2.9% Medicare on everything above. Plus an additional 0.9% Medicare surtax above $200k.
On $120k of contractor income, that's roughly $14,000 in self-employment tax that a W-2 employee never sees on their pay stub. The IRS expects quarterly estimated payments — miss those and you owe penalties.
The benefits gap
Your W-2 paycheck includes invisible compensation: employer-paid health insurance ($600–1,800/month for a family plan), 401(k) match (typically 3–6% of salary), paid time off (10–20 days), short-term disability, life insurance, employer's share of FICA.
A common rule of thumb is that benefits add 25–35% to your stated W-2 salary. So a $120k W-2 job is closer to $150k–162k of actual employer cost. To match that as a contractor, you need to bill enough to cover the same things yourself.
Utilization rate (the bench time problem)
A W-2 employee bills 0% — they're paid for all working hours regardless. A contractor bills only the hours they actually invoice for. The rest — sales calls, contract negotiation, vacation, gaps between projects, learning new tools — is unpaid.
Industry surveys put realistic billable utilization at 70–85% for established consultants and 50–70% for those still building a pipeline. At 75% utilization, you're actually billing 1,560 hours a year, not 2,080. That changes the math substantially.
A consultant who calculates "my rate" by dividing their target income by 2,080 is implicitly assuming 100% utilization. They will under-bill, work extra hours to hit the income target, and burn out within two years.
W-2 contract vs 1099 vs Corp-to-Corp
Three structures, three different tax treatments:
- W-2 contract: you're an employee of a staffing agency. They handle FICA + withholding. Cleanest for taxes, lowest rate (because the agency takes a cut).
- 1099 independent contractor: you handle SE tax + estimated payments. Higher rate. Subject to IRS scrutiny on misclassification.
- Corp-to-Corp (C2C): you bill through your own LLC or S-Corp. Higher rate still. The S-Corp election can save substantial SE tax above ~$80k/year, but adds payroll + corp tax compliance complexity.
The honest math
A $120k W-2 salary, replaced by independent contracting at 75% utilization with self-paid benefits and self-employment tax, requires roughly $90–110/hour to be equivalent in actual take-home. Anything below $80/hour and you're working harder for less money than the W-2 job — even though the headline rate looks higher.
Our contract rate calculator computes four rate variants (naive, benefits-equivalent, W-2 contract, 1099/C2C) with self-employment tax including the 2024 Social Security wage base, additional Medicare surtax, configurable benefits cost, and utilization rate. The output is daily, weekly, monthly, and annual equivalents with a transparent breakdown of where every dollar goes.