I’ve been working for myself as a 1099 federal sub-contractor since 2015. If you’re not sure what a “1099” is, it simply refers to the tax form that independent contractors receive from companies they worked for. Colloquially, I just refer to independent contractors as 1099s.

I have never enjoyed being an employee. I don’t like having a boss, I like to take vacation time without a manager’s approval, and I definitely want to earn more money than I could as an employee. If that is a path you’re interested in pursuing, as someone with a security clearance, you have quite a bit of market value and leverage to be able to successfully pull it off.

But first, it’s important to know what you could potentially earn as a 1099 in order to make an informed decision. We’re going to estimate how much revenue you can earn as a 1099, subtract relevant costs, and then compare it to your W2 compensation.

To estimate revenue, we’re going to start by using the “divide by 1000” method.

Take your salary (or salary from new job offers) and divide by 1000

To make the math easy, let’s say you make $100,000 per year as a W2 government contractor employee or have received job offers for $100,000 (perhaps from a ClearanceJobs.com company).

Divide $100,000 by 1,000 to get $100.

This is a decent estimate of the hourly rate the company is billing the government for your services: $100/hour.

Most contracts calculate a full work year minus vacation and holidays at around 1850 hours. As a 1099, I like to take even more time off so let’s call it 1800 hours (which ends up being about five weeks off plus federal holidays).

That means as a 1099, you could potentially make $100/hour X 1800 hours = $180,000 in revenue.

Note that we haven’t factored in your 1099 costs yet (there are a few) so you’re not making a full $80,000 more.

In addition, you should take that $100/hour figure and calculate +/- 20% of that figure to get a rate range. I like to use a range because it will encapsulate multiple outcomes, not a single one to which you’d be psychologically anchored.  Subtracting 20% would be $80/hour or $144,000 in revenue per year. Adding 20% would be $120/hour or $216,000 per year.

For math purposes, I’m going to stick with $100/hour for now.

Billable Rate ($/hour) Annual Billable Hours Revenue
 $            80.00 1800  $ 144,000.00
 $          100.00 1800  $ 180,000.00
 $          120.00 1800  $ 216,000.00

Subtract your 1099 costs

As a 1099, you will have to account for the benefits that you would normally receive as an employee, the most important being health care. In addition, there are a few costs you will incur as a 1099 that you wouldn’t as an employee as well as some additional taxes.

Let’s factor in health care and some of those business costs first.

Health care

For health care, I went to ehealthinsurance.com and looked up the cost of plans for a 40-year-old male. You can get a “BlueChoice HMO Gold” plan for $575.43 per month or $6905.16 annually.

Dental insurance and vision insurance are $49.25/month and $14.38/month respectively or $591.00 and $172.56 annually.

Your total cost for health care, dental, and vision is $7,668.72 per year.

Your health care costs may be more or less. For example, if you have access to a spouse’s health care plan, it may be free! Or it may be more if you have multiple dependents on your plan.

Your employer will also likely offer COBRA once you quit, which allows you to pay to keep your current health insurance plan. Often, the CORBRA plans have better rates/benefits than what you can get on the individual market.

Miscellaneous business expenses (MBX)

I won’t bore you too much with the details here but things like business insurance, registration fees, etc. will cost you less than $1000 per year.

At this point, your net income will be $171,331.28.

Category Costs
Revenue  $      180,000.00
Health/Dental/Vision  $        (7,668.72)
MBX  $        (1,000.00)
Total  $      171,331.28

Self- employment tax

Now you have to account for…self-employment tax! Self-employment tax is the same FICA/Medicare/ Medicaid tax you pay as an employee. However, as a W2, you pay one half, and your employer pays the other half.

As a 1099, you are both the employer and the employee, so congratulations, you get to pay both parts! The total self-employment tax rate is 15.3% (12.4% for social security and 2.9% for Medicare).

You pay this rate for the first $142,800 in annual income for the 2021 tax year. Then you only pay the 2.9% Medicare tax on any income above that up to $200,000 (if you’re single) and then an additional Medicare Tax of 0.9% on income above $200,000 (again, if you’re single), for a total of 3.8% on income above $200,000.

It’s a bit complicated. The easiest thing you can do is Google “self-employment tax calculator” and use the calculator to do the math for you. You would just type in your 1099 income, and it would spit out the figure.

You can also deduct the employer half of the self-employment tax as a business expense, so the net effect is a bit less. For our exercise, I’m going to ignore that.

Since we’re trying to make an accurate comparison to your W2 compensation, we only need to factor in the additional tax you will pay as a 1099, which is exactly 1/2 of the total self-employment tax.

1/2 of 15.3% is 7.65%. You will pay this rate on the first $142,800 of your income, which comes out to $10,924.

You will then pay 1/2 of 2.9% on amounts you earn over $142,800 up until $200,000. 1/2 of 2.9% is 1.45%. You earn $171,331.28 in this scenario so the amount over $142,800 is $171,331.28 – $142,800 = $30,200. Multiply this by 1.45% to get $438.

Your total additional self-employment tax liability is $10,924 + $438 = $11,362.

This yields a 1099 income of $159,993.58 with a self-funded benefits package of five weeks of PTO and a health care package.

Category Costs
Revenue  $      180,000.00
Health/Dental/Vision  $        (7,668.72)
Misc. Business Expenses  $        (1,000.00)
Total before SE Tax  $      171,331.28
1/2 of SE Tax  $      (11,337.70)
1099 Income  $      159,993.58

Compare your total W2 compensation to your 1099 income

We figured out what would you make as a 1099, but it’s important to compare it to what would make or would make as a W2 employee to determine how much more you’d make as a 1099 and to see if it’s worth the risk.

Determine your W2 compensation package

To compare your current W2 compensation package (or the one you’d receive from a new employer), we need to account for more than just your salary. Things like bonuses, 401k matches, and health care benefits need to be factored in.

This is a straightforward exercise. We are going to add up your annual salary, any 401k matching benefits you receive, and any bonuses you anticipate receiving.

If you earn $100,000 per year in salary, receive a 5% 401k match ($5,000), and anticipate receiving a 5% bonus ($5,000). The cash component of your compensation is $110,000.

Now let’s tackle any benefits you receive from the company. We want to determine what it costs you to get these benefits.

This is a weird way to think about it because your instinct is probably to figure out the value of your benefits. However, since we are trying to make the apples-to-apples comparison with your projected 1099 income, we need to normalize the cost of any benefits you receive as a W2 that you will purchase for yourself as a 1099.

So let’s take your health care plan. As a W2, figure out how much it costs you to be on your company health care plan. If your company pays 100% of your premium, that figure is 0. If you pay $200/month, multiply by 12 to get $2400/year.

You can repeat that for any perks you receive, but for this example, I’m going to assume Health/Dental/Vision is the only financially significant benefit that we need to account for.

I am not going to include the value of PTO here since you are not getting paid more for PTO. Your salary is inclusive of any PTO you take.

Subtract the cost of any benefits you receive from the total cash component of your income to arrive at your W2 compensation figure, which is $107,600. This is the number we are going to compare to your 1099 income.

Category Amount
Salary  $          100,000.00
Bonus (5%)  $              5,000.00
401k (5%)  $              5,000.00
Health/Dental/Vision Cost $           (2,400.00)
W2 Compensation  $          107,600.00

How much more could you make?

 Here is how it plays out when you compare a $100,000 W2 salary with a nice benefits package to a 1099 gig with a $100/hour billable rate and a self-funded benefits package.

Category Amount
1099 Compensation  $          159,993.58
W2 Compensation  $          107,600.00
Difference in $  $            52,393.58
Difference in % 49%

As a 1099 in this scenario, you would make $52,393.58 more than you would as a W2 employee. This is a 49% increase in compensation. It would be pretty tough to get a 49% raise, so this seems like a good move to me!

Of course, that was assuming the billable rate was $100/hour. If we adjusted for 20% less and 20% more, here is how the numbers would shake out.

Category $80/hour $100/hour $120/hour
1099 Compensation  $          124,775.44  $ 159,993.58  $ 195,224.19
W2 Compensation  $          107,600.00  $ 107,600.00  $ 107,600.00
Difference in $  $            17,175.44  $   52,393.58  $   87,624.19
Difference in % 16% 49% 81%

On the low end at $80/hour, you would only make $17,175.44 or 16% more. This does not seem like a reasonable return on the risk you would be taking on as a 1099. However, on the high end at $120/hour, you would make a whopping $87,624.19 or 81% more!

You can use the method above to determine if becoming a solo 1099 federal sub-contractor is financially worth it to you. It was for me.

If you have any questions about going 1099, feel free to e-mail me at dale@1099fedhub.com directly.


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