How much more does an employee cost than their salary?

With an 8.65% employer payroll tax rate (7.65% FICA plus roughly 1% blended FUTA/SUTA) and a 30% benefits load, an $80,000 salary costs $110,920 in total — 38.65% above the base salary figure.

What's included in employer payroll tax?

The FICA employer match is a fixed 7.65% (6.2% Social Security up to the annual wage base, plus 1.45% Medicare, uncapped). On top of that, FUTA nets to an effective 0.6% on the first $7,000 of wages after the standard state credit, and SUTA (state unemployment) varies by state — commonly adding roughly another 1% when blended.

Is a 1099 contractor always cheaper than a W-2 employee?

Not always — it depends on the contractor's quoted rate relative to the employee's fully-loaded cost. In a worked example with a $95,000 contractor rate against a $110,920 fully-loaded employee cost, the contractor came out $15,920/year cheaper. A contractor quoting above the fully-loaded employee cost would make the employee the cheaper option instead.

Can I just pay someone as a 1099 contractor to save on payroll tax?

Only if the working relationship legally qualifies as a contractor relationship under IRS and Department of Labor tests — misclassifying an employee as a contractor to avoid payroll tax carries real penalty and back-tax risk regardless of what a cost comparison shows.

That $80K Offer Actually Costs $110,920 — What Payroll Tax and Benefits Add to Every Hire

We ran a straightforward first-hire scenario through the numbers: an $80,000 base salary, the standard 8.65% employer payroll tax load, and a 30% benefits load. The salary a founder budgets and the number that actually leaves the business account turned out to be two different figures.

Where the extra $30,920 goes

Line item	Amount
Base salary	$80,000
Employer payroll tax (8.65%)	$6,920
Benefits load (30%)	$24,000
True annual cost	$110,920

The payroll tax line is fixed and non-negotiable — 7.65% FICA employer match plus blended unemployment insurance applies to every W-2 hire regardless of company stage. The benefits load is where founders have more room to adjust: a leaner benefits package (say, 20% instead of 30%) would bring the true cost down to $104,000 instead of $110,920, still well above the $80,000 headline number.

Where the contractor comparison flips

Compare that $110,920 fully-loaded cost to a contractor quoting $95,000 for equivalent output, and the contractor wins by $15,920/year — even though $95,000 sounds like a bigger number than the $80,000 salary most founders anchor on first. The comparison only makes sense once both sides are apples-to-apples: the contractor’s rate already covers their own self-employment tax and benefits, so nothing gets added on top of it, while the employee’s base salary needs both loads applied before the two numbers are comparable.

Why this catches first-time founders specifically

Anyone who’s only ever been paid a salary tends to budget hiring the same way they think about their own paycheck — the number on the offer letter. Anyone who’s run payroll before knows the loaded cost by instinct. The gap between those two mental models is exactly the $30,920 this example surfaces, and it’s the single most common line-item surprise in a first-hire budget.

Where this comparison doesn’t apply

Worker classification isn’t actually a choice. The IRS and Department of Labor use behavioral, financial, and relationship tests to determine whether a worker is legally an employee or a contractor — the cheaper option on paper doesn’t override the legal test.
You need to direct day-to-day work. Contractors are generally expected to control how they do the work; needing to set hours, provide equipment, and direct daily tasks points toward employee classification independent of cost.
Your state’s payroll tax rates differ meaningfully from the blended default. SUTA rates and wage bases vary significantly by state — always check the real number rather than assuming the default.
You’re weighing retention and equity participation, not just cost. Some founders deliberately pay a premium for W-2 employment, valuing long-term commitment over the cheapest per-dollar comparison.

What to actually do

Check your specific state’s SUTA rate and wage base before finalizing a hiring budget — the default blended estimate is a starting point, not your actual number.
Get a real benefits quote (health insurance especially) rather than guessing at a load percentage.
Confirm any contractor relationship you’re considering actually qualifies as one under the IRS common-law test before deciding based on cost alone.
Budget the fully-loaded cost from day one — a hiring plan built around base salary alone will run over budget by 30-40% almost every time.

For the freelancer side of this same question — what rate a freelancer needs to charge to replace a salary — see Freelancer Rate, and for what a founder can safely pay themselves once the business is generating revenue, see Founder Salary Sustainability.

Open the Contractor vs Employee Cost Calculator → and run your own hire’s numbers.