One of the most common questions from small business owners: “Should I hire this person as an employee or a contractor?” The instinct is that contractors are cheaper. Sometimes that’s true. Often it isn’t — especially when you add up what you’re actually paying on the employer side.
What You Pay for a W-2 Employee
When you hire an employee, your cost goes well beyond their salary. Here’s what’s on top of every dollar of gross wages:
| Cost | Rate | Notes |
|---|---|---|
| Social Security (FICA) | 6.2% | On wages up to $176,100 |
| Medicare (FICA) | 1.45% | No cap |
| FUTA (federal unemployment) | 0.6% | On first $7,000 of wages |
| SUTA (MA state unemployment) | 2.42%–9.26% | On first $15,000; rate varies by experience |
| MA PFML (employer share) | 0.42% | If 25+ employees |
| Workers’ comp insurance | ~1–3% | Varies by industry |
Rough total employer burden: ~10–12% on top of gross wages for a typical Massachusetts employer with no prior unemployment claims.
So if you pay an employee $60,000 in salary, your actual cost is closer to $66,000–$67,200.
What You Pay for a 1099 Contractor
With a contractor, you pay the invoice. No FICA, no FUTA, no SUTA, no PFML, no workers’ comp.
Your costs are exactly what they charge.
But there’s a catch: contractors charge more per hour to compensate. A contractor earning $75/hr is pricing in their own self-employment tax (15.3%), health insurance, retirement, and the fact that they have no paid time off. A W-2 employee at $75/hr equivalent is getting benefits that your business provides.
Real Comparison: $75,000/Year Role
| W-2 Employee | 1099 Contractor | |
|---|---|---|
| Base compensation | $75,000 | $75,000 |
| Employer FICA | $5,738 | $0 |
| FUTA | $42 | $0 |
| MA SUTA (avg) | $363 | $0 |
| PFML employer share | $315 | $0 |
| Workers’ comp (~1.5%) | $1,125 | $0 |
| Health insurance | $6,000–$9,000 | $0 |
| Total employer cost | $88,583–$91,583 | $75,000 |
On paper, the contractor saves you $13,000–$16,000 per year. But this assumes:
- The contractor charges the same rate as the employee’s salary
- You don’t need them full-time year-round
- They pass the IRS control test (more on this below)
The Misclassification Risk
The IRS and Massachusetts DOR take worker misclassification seriously. Massachusetts uses the ABC test: a worker is presumed to be an employee unless you can prove all three:
- (A) They’re free from your control in how they do the work
- (B) They perform work outside the usual course of your business
- (C) They’re independently established in that trade or occupation
Misclassifying an employee as a contractor means you owe back taxes, penalties, and interest — plus potential civil liability. The savings aren’t worth the risk if the relationship looks like employment.
When Contractors Actually Make Sense
- Project-based work with a clear end date
- Specialized skills you need infrequently (lawyer, designer, consultant)
- The person genuinely runs their own business and works with multiple clients
- You don’t control how they do the work, only the outcome
When Employees Make More Sense
- Ongoing, full-time work central to your business
- You need control over schedule, methods, and tools
- Long-term investment in someone who’ll grow with the company
- Client-facing roles where consistency and accountability matter
Bottom Line
The real question isn’t “employee or contractor?” — it’s “what does this role actually require?” If the work is ongoing and central to your business, hire an employee and price in the real cost. If it’s project-based or specialized, a contractor may genuinely be the right fit.
Use the OtterDesk payroll calculator to see the full employer cost breakdown for any W-2 employee in any New England state.