Contractor vs Employee Salary Comparison
Compare a full-time salary against a specific hourly contract rate to see which actually pays more.
When to use this tool:
- Evaluate distinct job offers
- Assess overhead differences
- Compare true total compensation
How it's Calculated
- Contract Gross = Rate × Hours × Weeks.
- True Equivalent = Contract Gross minus the Self-Employment Overhead %.
- Difference = True Equivalent - Employee Salary.
Key Assumptions
- The overhead percentage accounts for self-employment tax, missed retirement matching, absence of PTO, and health insurance costs.
- Calculates comparative gross equivalence. Exact net tax outcomes may slightly differ.
Actionable Insights
- The most common mistake contractors make is setting their overhead percent to 0. A safe baseline is 30% to account for everything a salaried role provides implicitly.
- If the 'Difference %' is less than +15%, the stability of the employee role might make it more valuable than the contract.
Frequently Asked Questions
Usually 20-30%. This accounts for self-employment taxes (approx 15.3% in the US), healthcare premiums, skipped pension contributions, and unpaid sick days.
Because Gross Revenue is business cash flow, not your salary. The True Equivalent backs out the business costs your employer normally pays.
Yes. If you must buy your own laptop and software licenses as a contractor, mentally raise the overhead percentage to compensate.
Because the employee receives the full salary regardless of taking the 4 weeks PTO. The contractor loses billable hours when taking PTO, which is handled via 'Weeks/Year'.
Mathematically yes. A negative difference means you are taking on all the business risk of contracting while effectively taking a pay cut.
Yes, as long as you factor the local self-employment compliance costs into the overhead percentage precisely.
How much does a contractor make?
Independent contractors generally earn a higher gross hourly rate than salaried employees, but their net take-home pay is often lower than it appears. To match the lifestyle of a $100k employee, a contractor typically needs to gross $130k to $150k annually. A $50/hour W-2 salary requires a $65 to $75/hour 1099 contract rate just to break even.
Employee Salary vs Contractor Hourly Rate
You cannot directly compare an employee salary to a contractor hourly rate. An employee is paid for 52 weeks regardless of holidays, sick days, or slow periods. A contractor is paid strictly for billable hours worked. Therefore, 2,000 standard working hours rarely equal 2,000 billable contract hours. You must discount your expected hours to account for admin work and unpaid time off.
Taxes and Benefits Differences
| Factor | Employee (W-2) | Contractor (1099) |
|---|---|---|
| Taxes (US) | Employer pays half FICA | You pay full 15.3% Self-Employment Tax |
| PTO & Sick Leave | Paid | Unpaid (lost revenue) |
| Insurance & Perks | Subsidized by employer | 100% out-of-pocket |
What Overhead to Assume
When using this calculator, a safe assumption for Self-Employment Overhead is 25% to 35%. This buffer covers the employer half of payroll taxes (7.65%), the cost of acquiring your own health insurance (often 5-10% of gross), missing 401(k) matches (3-5%), and the cash equivalent of 4 weeks of unpaid vacation. If you also need to purchase your own software licenses, equipment, and liability insurance, push this overhead assumption closer to 35%.
Break-Even Formula
To find your break-even point, adjust the Hourly Rate input until the Contractor True Equivalent perfectly matches the Employee Base Salary. If your target client won't approve that break-even rate, you are effectively taking a pay cut to become a contractor.
Related Information
- Guide: Contractor vs Employee Pay: A deeper dive into the math behind the freelance premium.
- Freelance Rate Calculator: Calculate your exact target hourly rate based on living expenses.