Self-Employment — Contractors vs Employees

Year-one decision: every person on the team works as their own LLC or sole proprietorship and bills Augmented Traveler as an independent contractor. This note records what that saves compared with hiring W-2 employees, what it shifts onto each contractor, and what the studio still has to do.

Not legal or tax advice

These figures are general 2026 US numbers for planning. Confirm classification, state rules and contracts with an employment attorney or CPA before anyone starts work.

Do the budget's full-time rates include employer costs?

Yes, in the personnel model. The "full-time remote employee" lines in Year One Budget — Personnel cost base salary × (1 + 25–35% employer load). That load covers the employer's payroll taxes and benefits.

Federal income-tax withholding is not an extra cost. It comes out of the employee's own pay; the employer only sends it on. The same is true of the employee's half of Social Security and Medicare.

What a W-2 employee costs on top of salary

Worked example: one employee paid $130,000 a year (about the middle of the Unreal and AI engineer ranges).

Cost Rate (2026) On $130,000
Social Security (employer share) 6.2% of wages up to the $184,500 wage base $8,060
Medicare (employer share) 1.45%, no cap $1,885
Federal unemployment tax (FUTA) 0.6% of the first $7,000 (after state credit) $42
State unemployment tax (SUTA) about 1–4% of the state wage base (new-employer rates vary) about $300–$2,000
Workers' compensation low for office and remote work; varies by state about $150–$650
Required by law, subtotal about 8–10% about $10,500–$12,600
Health insurance (employer share, single coverage) KFF 2025 average single premium $9,325; employer typically pays about 80–85% about $7,500–$8,000
401(k) match 3–4% is typical $3,900–$5,200
Payroll service or PEO about $50–$150 per employee per month $600–$1,800
Typical total load about 20–35% about $23,000–$28,000

Paid time off and holidays are not a separate cash cost; they are paid days with no work. They reduce the hours bought, not the dollars spent.

Family coverage raises the health-insurance line a lot: the KFF 2025 average family premium is about $26,993, with the employer paying most of it.

For comparison, the BLS Employer Costs for Employee Compensation survey puts benefits at about 30% of total compensation in private industry. That figure includes paid leave and larger-company benefits, so a small startup package usually comes in lower.

What changes when each person is their own LLC

What the studio no longer pays:

What moves onto the contractor:

What that means for the rate: contractors price all of this in. Expect them to charge about 20–40% more than the matching salary would work out to per hour. So the saving is smaller than the load suggests. The studio mainly gains flexibility and less administration, not a large cash saving.

Effect on this budget: Scenario B priced the Unreal, AI and DevOps engineers as full-time employees with the 25–35% load. If they bill as LLCs at a normal contractor premium instead, their cost will be about the same. The roles that were already priced as contracts don't change.

What the studio still has to do

Misclassification risk

The IRS and the states decide classification by how the work is actually done, not by what the contract calls it. Some states are much stricter than the IRS.

Lower-risk options:

Sources

Related: Year One Budget — Personnel · Year One Budget — Combined Summary · Roles and Hiring Plan · Sources page: Sources — 2026-09-19