How Much More Should a Contractor Make Than an Employee?

Updated September 5, 2026 · US examples in USD

The contractor premium depends on costs and the hours you can actually bill. A salary divided by 2,080 hours is a starting comparison, but it does not replace benefits, business expenses or the revenue lost during time off.

Worked example: Replacing a $100,000 W-2 salary with 40 billable hours a week, 46 billable weeks and 25% of revenue reserved for additional costs requires $72.46 per hour. That is about 51% above $100,000 divided by 2,080 scheduled employee hours. It is an example, not a universal market premium.

Calculate your break-even contractor rate

Use the same definition of overhead as the calculator

Here, overhead is a percentage deducted from contractor revenue. It excludes unpaid vacation, holidays and assignment gaps, which reduce billable weeks instead. With that definition, the formula is:

Break-even hourly rate = salary target ÷ (billable hours per week × billable weeks × (1 − overhead percentage ÷ 100)).

For the example: $100,000 ÷ (40 × 46 × 0.75) = $72.46 per hour. Multiplying the salary target by 1.25 is not equivalent to reserving 25% of revenue. At this break-even rate, annual revenue is approximately $133,333; deducting $33,333 leaves the $100,000 salary equivalent before personal income tax.

How unpaid weeks change the rate

These examples keep the salary target at $100,000, weekly billable hours at 40 and revenue overhead at an illustrative 25%.

Reduce billable hours too if proposals, administration or business development take time each week. Forty working hours do not necessarily mean forty billable hours. Avoid counting the same gap once as fewer billable weeks and again as a percentage cost.

List the costs your employer currently absorbs

• Additional payroll-tax burden under independent contracting.
• The extra cost of replacing your employer health plan.
• Lost employer retirement contributions, allowing for vesting.
• Accounting, business insurance, equipment and software.
• A separately chosen margin for uncertainty.

Use actual quotes and benefit statements where possible. A single overhead percentage is a planning shortcut. Advanced mode in the calculator separates percentage costs from annual dollar amounts. Its formula becomes (salary target + fixed annual costs) ÷ (billable hours × billable weeks × (1 − percentage costs)).

Understand what the US tax assumptions do and do not mean

The IRS self-employment tax guidance explains Social Security and Medicare obligations. Do not simply deduct a headline self-employment tax percentage from revenue and compare it with an employee’s pretax salary: employees also pay payroll taxes, and the calculation bases, limits and deductions differ.

The calculator’s extra payroll-tax input is a planning proxy for the additional burden, not a complete federal or state tax calculation. The retirement percentage is also applied to contractor revenue in this model; an employee’s actual 401(k) match may instead be based on salary and contribution rules.

Compare a real offered rate with the minimum

A $75/hour contract at 40 hours for 46 weeks produces $138,000 in revenue. After the example’s 25% overhead, the salary equivalent is $103,500. That is only $3,500 above the employee’s $100,000 salary. Reducing billable weeks to 44 produces $99,000 after overhead. This sensitivity matters when an assignment is short or renewal is uncertain.

A contract worker may also be employed by an agency on W-2 payroll. This model is for independent contracting, not every temporary role. See the IRS worker-classification guidance; classification is not something a pay calculator decides.

Plan beyond the headline rate

Use the freelance risk calculator for savings runway and read the risk-pricing guide. The PTO calculator shows the salary value of paid leave without adding it to salary again. For two employee offers, use the job offer comparison.