Contractor and 1099 payroll cost: per-contractor pricing across providers

The W-2 versus 1099 cost-to-employer comparison

The headline cost difference between paying someone as a W-2 employee versus a 1099 contractor is substantial on the employer side. For a W-2 employee earning $60,000 in gross wages, the employer pays an additional 7.65 percent FICA (Social Security plus Medicare) of $4,590, federal unemployment insurance of perhaps $42 (0.6 percent on the first $7,000), state unemployment insurance of $500 to $3,000 depending on state and claim history, and workers' compensation premium of $300 to $9,000 depending on industry. Total mandatory employer overhead is typically $5,000 to $17,000 on a $60,000 W-2 employee, depending on state and industry.

For a 1099 contractor invoicing $60,000, the employer pays $60,000. None of the FICA, FUTA, SUI, workers' comp, or benefits costs apply. The contractor is responsible for their own self-employment tax (15.3 percent), their own insurance, their own retirement savings. On pure direct cost, contractor structure saves 8 to 25 percent over W-2 employment.

The catch is that the IRS and state labour departments have specific criteria for determining whether a worker is genuinely a contractor or actually an employee, and misclassification penalties are severe. The cost savings only apply when the contractor genuinely meets the criteria, which is harder than many businesses assume.

The misclassification risk that overshadows cost savings

The IRS uses a multi-factor common-law test to determine worker classification. Behavioural factors: does the business control how the work is done? Financial factors: does the worker have unreimbursed business expenses, opportunity for profit or loss, services available to multiple clients? Relationship factors: is there a written contract, employee benefits, ongoing relationship expectation, permanency? No single factor is determinative; the IRS weighs the totality.

California's Assembly Bill 5 (AB5) imposes a stricter ABC test that presumes worker is an employee unless three specific conditions are met. Several other states have moved toward similar tests. The practical implication: workers who do ongoing work for one client, are integrated into the client's operations, lack genuine independence, and have no other clients are very likely to be classified as employees regardless of how they are paid.

Misclassification penalties: back payroll taxes (employer plus employee FICA portions), interest, penalties at 25 to 100 percent of unpaid amounts, possible state-level unemployment insurance back-assessment, possible class action exposure if multiple workers were misclassified. For a business that misclassified 5 workers earning $60,000 each over 2 years, total exposure can easily exceed $100,000. The cost of getting classification right far exceeds the cost of payroll service in either configuration.

Cheap contractor-only platforms: Square and Wave

Square Payroll Contractors at $6 per contractor per month with no base fee is the cheapest legitimate contractor payment platform in the US market. It handles ACH direct deposit, year-end 1099-NEC filing, and contractor self-service portal. The limitation is no W-2 support: if you ever need to pay a W-2 employee, you must add another platform or upgrade Square Payroll to its W-2 tier ($35 base + $6 per W-2).

Wave Payroll handles contractors at $20 base plus $6 per contractor in self-service states (where the customer files their own taxes) or $40 base plus $6 in full-service states. For an all-contractor business with 5 contractors, Wave is $50 to $70 monthly versus Square at $30. Wave's advantage is integration with Wave's free accounting software, which is appealing for solo founders. Square's advantage is the cleaner pricing and the bundled Square POS for businesses already using Square for payments.

When Deel is the right answer despite higher cost

Deel Contractor at $49 per contractor per month is more expensive than the US-focused alternatives but earns its premium on international contractor relationships. Deel handles contractor compliance documentation in 150+ countries, multi-currency payment, country-specific tax forms (1099-NEC for US contractors, equivalent forms in other countries), and the legal nuances of contractor classification across jurisdictions.

For a US business with 2 US contractors and 3 contractors in Eastern Europe, Latin America, and Asia, Deel at $245 monthly handles all 5 cleanly. The alternative would be Square Payroll Contractors ($12) for the 2 US contractors plus separate international payment mechanisms (PayPal, wire transfers, country-specific platforms) for the 3 international ones, which works but creates compliance documentation and reporting complexity. For any business with meaningful international contractor activity, Deel's bundled compliance is typically worth the premium.

Mixed W-2 plus 1099 workforces: pick one platform

For businesses with both W-2 employees and 1099 contractors, running both populations through one provider is operationally much cleaner than splitting between two platforms. Gusto Simple at $49 + $6 per person (regardless of W-2 or 1099 status), OnPay at the same pricing, and QuickBooks Payroll all handle mixed workforces cleanly. Year-end reporting consolidates W-2s and 1099-NECs from a single source. Tax filings are reconciled automatically.

The temptation to use a cheap contractor-only platform like Square for the 1099s and Gusto for the W-2s saves perhaps $30 monthly but creates year-end reconciliation work, dual data entry for any worker who switches classification, and operational fragmentation that compounds over time. For mixed workforces, paying the unified-platform price is almost always the right economic choice. The Gusto cost page covers the mixed-workforce pricing in detail.

Where to go next

Contractor / 1099 payroll cost FAQs