Contractor vs Employee Cost Calculator
(True Annual Cost Comparison)
Enter an employee's salary and benefit load alongside a contractor's hourly rate and the hours you need. See which route costs less over a year and the contractor rate at which they break even.
Employee option
Health cover, retirement match, employer payroll taxes, paid leave as a share of salary
Laptop, licences, workspace, training
Contractor option
Management time, onboarding, tools you supply
Hours of real work needed, not paid hours. A full-time year is 2,080 paid hours before leave and holidays
Result
💡 Formula Guide
Why a Salary Understates What an Employee Costs
A contractor's hourly rate looks expensive next to a salary until you add everything an employer pays around that salary. A $85,000 employee is not an $85,000 expense. Payroll taxes, health cover, retirement matches, paid leave, equipment and software all sit on top, and a contractor's invoice usually replaces most of them. Comparing the two headline numbers leaves those costs out.
The US Bureau of Labor Statistics measures this in its Employer Costs for Employee Compensation series. For June 2026 it reported that employer costs for private industry workers averaged $46.89 per hour worked: $32.82 in wages and salaries (70.0%) and $14.07 in benefits (30.0%). Benefits here include legally required items such as employer Social Security and Medicare, plus paid leave, insurance and retirement. A 30.0% share of total cost equals about 43% on top of wages (14.07 ÷ 32.82). That is an average across many employers, not a figure for your payroll. The release is on the BLS website.
The Two Cost Formulas
Example. An $85,000 salary with a 30% load and $4,000 of equipment and software costs $85,000 × 1.30 + $4,000 = $114,500 a year. A contractor at $60 an hour for the same 1,800 productive hours, with $1,000 of management overhead, costs $108,000 + $1,000 = $109,000. The contractor is cheaper by $5,500, but the employee's effective cost is $114,500 ÷ 1,800 = $63.61 an hour. The break-even contractor rate is ($114,500 − $1,000) ÷ 1,800 = $63.06, so a contractor above roughly $63 an hour would cost more.
Where the Load Percentage Comes From
The load percentage is the calculator's most important assumption, so it is worth building from real components rather than guessing. Typical building blocks for a US employer:
| Component | How it is usually charged | Notes |
|---|---|---|
| Social Security and Medicare | 6.2% + 1.45% = 7.65% of wages (Social Security stops at $184,500 for 2026) | Legally required; the employee pays a matching share (IRS Topic 751) |
| Unemployment insurance | Federal and state rates on a capped wage base | Varies by state and claims history |
| Health and other insurance | Employer share of premiums | Often the largest single benefit cost |
| Retirement match | Percentage of salary matched | Only if offered |
| Paid time off | Paid days not worked | Reflected in productive hours, so do not double count |
| Workers' compensation | Rate per payroll dollar by job class | Also covers some contractors in certain states |
Add the components that apply to you and enter the sum. If you already count paid time off in the load, use total paid hours rather than reduced productive hours, or you will count the same cost twice. The 30% the calculator opens with is only a starting value. It is below the BLS private industry average of about 43% over wages, so check it against your own costs.
Cost Is Not the Same as Classification
Whether a person can be a contractor depends on the relationship, not on which option is cheaper. In the US, the IRS common-law test asks about behavioral control (do you direct how the work is done), financial control (who provides tools, who bears profit or loss risk), and the nature of the relationship (written contracts, ongoing work that is central to the business). Some states apply stricter tests, such as an ABC test. Misclassifying a worker can result in back payroll taxes, penalties and interest, and workers may have claims for overtime and benefits.
⚠️ Note: a short-term project with a specialist who sets their own hours and brings their own tools suits a contractor. Permanent, supervised, full-time work in the heart of your business usually points to an employee, whatever the spreadsheet says.
Beyond legality, the trade-offs are practical. Contractors offer flexibility and specialist skills without a long-term commitment, while employees build knowledge of the business and can be directed day to day. Recruiting, onboarding, management time and turnover are hard to price but real, and none of them is captured in this comparison.
How to Use This Calculator
- Enter the employee salary you would offer and your benefits and payroll tax load.
- Add yearly overhead: equipment, software, workspace and training.
- Enter the contractor's hourly rate and any extra costs you bear, such as extra management time.
- Set productive hours per year, the hours of real work you need. Compare the annual totals, the employee's effective hourly cost, and the break-even contractor rate.
If you are the contractor, check what to charge with the Freelance Hourly Rate Calculator and estimate your own tax with the Freelance Tax Calculator. If you are scoping work, the Agency Retainer Calculator and Project Quote Calculator cover the pricing side. For a growing team, the Startup Runway Calculator shows how a new hire changes your months of cash.
Frequently Asked Questions About Contractor vs Employee Cost
How do you compare contractor cost with employee cost?
Convert both to a yearly figure for the same amount of productive work. Employee cost is salary plus employer payroll taxes, benefits and overhead; contractor cost is hourly rate times hours plus any extra costs you bear. Dividing the employee total by productive hours gives an effective hourly cost you can compare directly with the contractor's rate.
What is the true cost of an employee compared with salary?
Higher than the salary. BLS Employer Costs for Employee Compensation data for June 2026 shows benefits at 30.0% of total compensation for private industry workers and wages at 70.0%, which means benefits add about 43% on top of wages. That figure includes paid leave and legally required contributions, so it is a reference point rather than a rule for every employer.
What load percentage should I use for benefits and payroll tax?
Use your own numbers when you have them: the employer share of Social Security (6.2% of wages up to $184,500 for 2026) and Medicare (1.45%), unemployment insurance, health premiums, retirement match and paid time off. The calculator opens with 30%, which is only a starting value and is below the BLS private industry average of about 43% of wages. Change it to your own figure.
Why does the calculator use productive hours instead of 2,080?
An employee paid for 2,080 hours does not produce 2,080 hours of work after holidays, leave, training and admin time. A contractor is usually billed only for time worked. Comparing on productive hours avoids understating the employee's hourly cost. Take 2,080 and subtract the paid hours your employees do not work.
What is the break-even contractor rate?
It is the hourly rate at which a contractor costs exactly the same as the employee over the same productive hours: employee total cost minus contractor extra costs, divided by hours. A contractor charging less than that saves money on paper; charging more costs more, and the calculator shows the gap.
Can I just choose whichever is cheaper?
No. Worker classification is a legal question. In the US, the IRS looks at behavioral control, financial control and the relationship between the parties, and some states apply stricter tests. Treating someone who works like an employee as a contractor can bring back taxes, penalties and interest. Cost is only one input to the decision.
What costs does this comparison not capture?
Recruiting and onboarding time, management attention, turnover, intellectual property arrangements, flexibility to scale up or down, and the value of institutional knowledge. Employees tend to build long-term capability; contractors give flexibility. Those trade-offs can outweigh a few percent difference in yearly cost.
Does this work for countries outside the US?
The arithmetic does, but the default load and the legal notes reflect US practice. Employer contributions, leave entitlements and classification rules differ by country, so enter your own load percentage and check local employment law before deciding.
Last Updated: October 2026 | Benefit-share reference figures, checked on bls.gov in October 2026, come from the US Bureau of Labor Statistics Employer Costs for Employee Compensation release (June 2026). This is a cost comparison, not legal advice on worker classification.