Why "add 30%" is usually wrong
The rule of thumb says take a salary, add 25–30%, divide by 2,080 hours. It is a reasonable starting guess and a poor final answer, because it ignores the three things that actually differ.
What you are absorbing
- The employer's half of FICA: 7.65%. An employee splits payroll tax with their employer. A contractor pays both halves as self-employment tax, 15.3% on 92.35% of net profit. Half of it is deductible above the line, which softens but does not remove the hit.
- Benefits. Health insurance, the 401(k) match, paid holiday, sick leave, disability cover. For a typical employee this is worth 15–30% of salary and it disappears entirely.
- Business expenses. Equipment, software, professional insurance, accounting. These are deductible, which reduces the sting, but you still fund them.
Unbilled time is the biggest trap
The most common contractor pricing error is dividing by 2,080 hours, a full 52-week year. Nobody bills 52 weeks. Between holidays, illness, admin, business development and the gap between contracts, 44–48 billable weeks is realistic and the first year is often worse.
Pricing on 52 weeks and billing 44 means a 15% pay cut you did not agree to. The calculator asks for billable weeks precisely so that this is a deliberate assumption rather than an accident.
What works in your favor
Contracting is not purely a cost. The QBI deduction can shelter up to 20% of net business income, which an employee cannot claim. Self-employed health insurance premiums are deductible above the line. Retirement limits are far higher: a solo 401(k) or SEP-IRA allows contributions well beyond the employee 401(k) limit. And genuine business expenses reduce both income tax and self-employment tax, unlike an employee's unreimbursed costs, which are not deductible at all.
Set money aside from day one
No employer withholds for you. Quarterly estimated payments are due in April, June, September and January, and missing them triggers an underpayment penalty even if you pay in full at filing. Put 25–30% of every payment into a separate account the day it arrives. See the quarterly estimated tax calculator for your figure.
Don't forget the non-financial terms
A contract rate buys none of the protections employment carries: no notice period, no redundancy pay, no unemployment insurance, no employment-law protections. Whether that is worth pricing in depends on the length and stability of the engagement, but it belongs in the decision alongside the hourly number.