Going 1099: The Raise You Need to Break Even
The offer usually arrives sounding like a raise. Same work, same client, better rate, invoice monthly. The number in the email is bigger than the number on the payslip, and the only question anyone seems to ask next is about self-employment tax.
Self-employment tax is the least interesting thing about this decision. I will show you why, and then I will show you the thing that actually costs money, because when I ran the switch through my own engine the monthly take-home went up and the plan got a million dollars worse.
The tax, since we have to
Self-employment tax is both halves of FICA — the employee's and the employer's — at 15.3%, charged on 92.35% of net earnings. The Social Security portion (12.4%) stops at the wage base, $184,500 for 2026. The Medicare portion (2.9%) runs all the way up, with another 0.9% above the Additional Medicare threshold.
What almost nobody mentions in the same breath is that two deductions arrive with it. Half of the self-employment tax comes off before income tax. And the Section 199A qualified business income deduction can take up to another 20% off taxable income.
Run $150,000 through planbend's paycheck engine, married, North Carolina, no retirement deferral on either side so the comparison is clean:
A hundred and fifty-five dollars. On a $150,000 income. The thing everyone is afraid of is a rounding error, and it is a rounding error specifically because of two deductions that most people never hear about until a CPA mentions them in March.
I will admit this was not obvious to me either. planbend computed both deductions and then threw them away — the code calculated the numbers and never applied them — so for a while my own app showed a far wider gap than exists. Fixing that is what led to this post.
Now the part that costs money
Take the mid-career sample household. Marcus Hendricks, 44, earns $7,400 a month in operations. He defers 8% of it to a 401(k) and his employer matches 4%. He pays $310 a month for family coverage through payroll. His wife Priya earns $5,750 and the household has $343 a month of slack.
He goes 1099 in January at exactly the same rate. Nothing about the work changes. Here is what the plan does:
Take-home goes up $723 a month. The plan loses $1,128,614.
Those two facts are the same fact. Take-home rose because three things stopped leaving the paycheck before he ever saw them: $592 of 401(k) deferral, $310 of health premium, and $100 of other pre-tax deductions. Just over a thousand dollars a month that used to disappear on the way to his account now arrives in it, looking exactly like a raise. His payroll tax went the other way: $542 of FICA became $1,046 of self-employment tax, so $504 more. ($542 rather than 7.65% of his gross, because the health premium comes out before FICA is figured — one more small thing the section 125 plan was doing for him.) Against that, income tax fell on both paychecks: $77 off his and $147 off Priya's, because half the self-employment tax and the 20% section 199A deduction come off the income the two of them are taxed on jointly. That is $722 of the $723 the cash flow shows; the last dollar is rounding across the two paychecks.
None of that is a raise. Two of the three are bills he now pays himself, from the same money, from the other side of the ledger. And the deferral brought a friend on the way out: the 4% employer match, $3,552 a year, which is a percentage of a deferral that no longer happens and therefore goes to zero on its own. Between the deferral and the match, $888 a month of retirement saving stops — and a third of that was never his money to begin with.
The $1,450 of extra spending is the health plan, and it is the whole premium rather than the difference. While he was on payroll the $310 came out before he ever saw it, so it was never spending out of take-home; the day he goes 1099 the entire $1,450 is. That is the single largest line-item change in the switch. The app zeroes the old payroll premium automatically — the day the employer plan ends, that line is describing nothing — and then asks you for the replacement figure, because the only honest source for that number is a quote with your own ZIP code on it.
What the rate would have to be
So run it as a negotiation instead. $9,600 a month rather than $7,400 — a 30% uplift, which is roughly what the conventional advice says to ask for — plus a Solo 401(k) at $1,000 a month in place of the employer plan, and the same $1,450 of coverage.
That version works: $385,418 better off at the end, $781 more slack every month. The uplift is not greed. It is the price of replacing a match, a health plan and a payroll tax split that somebody else was carrying.
One honest note about how to read those two columns, because it changes what you should conclude. The monthly column responds to your rate. The horizon column mostly responds to contributions — the projection does not automatically invest a working-year surplus, because what happens to spare cash is a decision rather than a derivation. So a higher rate on its own moves the first column and not the second. It reaches the plan when you put it somewhere, which in this scenario is the Solo 401(k) line. That is worth knowing before you read too much into either number: a raise you do not save is a raise the plan cannot see, which is also true in life.
Four things to settle before you sign
Where the coverage comes from. If a spouse has an employer plan you can join, this decision is dramatically cheaper and you should check the family-tier cost today rather than assume. If not, get a real quote before you model anything. The health insurance gap calculator is built for the pre-Medicare version of this problem and the arithmetic is the same here.
Quarterly estimated payments. Nobody withholds for you any more. The tax in the table above is annual; the payments are due four times a year, and the first April as a contractor is where a lot of people discover they spent the government's money. Set it aside monthly, in a separate account, from the first invoice.
The retirement account you are replacing. A Solo 401(k) lets you contribute as both employee and employer, so the ceiling is higher than anything available to a W-2 employee. It does not replace the match, because now you are the employer. Decide the monthly figure deliberately and enter it, rather than discovering at year end that there was nothing left to contribute.
Whether the structure matters at your income. An S-corp avoids self-employment tax on distributions, which planbend models — but only alongside a reasonable W-2 salary, which the IRS expects and which the app tells you to enter as a separate income. Below roughly the point where the tax saving clears the extra accounting and payroll cost, it is paperwork with a tax story attached. That one is a conversation with a CPA.
And the part no projection can price
Income volatility. A salary is a number that arrives whether or not March was a good month; an invoice is not. The arithmetic above treats $9,600 a month as a fact, and for a contractor it is an average with a shape — one client leaving, one slow quarter, one invoice ninety days late.
The usual answer is a bigger emergency fund, and it is the right answer. If you are modelling this switch, model the cash buffer with it: raise the emergency fund target to cover the number of months it would take to replace your largest client, and see what that does to the slack. It is a less exciting change than the rate negotiation and it is the one that decides whether you can hold the line on the rate.
Run it before you answer the email
The real app, the sample household, everything unlocked, nothing saved. Scenarios tab, Scenario Toggles, press If one of us went 1099…. Pick whose income, pick the structure, put in the rate you have actually been offered and the coverage quote you have actually been given. The app handles the match, the deferral and both deductions on its own — those are consequences, not choices — and asks you only for the things it cannot know.
Then try it at the rate you were going to accept, and at the rate you now think you should ask for. The gap between those two numbers is the post.
For your own plan, planbend is free to start and never asks for a bank login. If the move is part of a wider change — one income instead of two, or a house that comes with a new mortgage rate — stack those changes in the same panel and read the combined answer rather than three separate ones. And for the tax structure specifically, the Connect with a professional page lists directories worth using.