Contractor vs Employee Pay: Build a Comparable Annual Budget
A contract's hourly rate and an employee's salary describe different things. Convert the contract into annual revenue, account for costs it must support, and keep taxes and benefits on a consistent basis.
Start with billable hours
A $75 rate for 40 billable hours across 46 weeks produces $138,000 annual revenue. At 30 billable hours across the same weeks, it produces $103,500. Unpaid leave, administration and gaps belong in the hours or weeks estimate. They should not also be deducted as a second charge for the same missing time.
List replacement costs
Record business expenses, extra insurance cost, retirement contributions you want to replace and an appropriate tax estimate. Employer benefits differ; a universal percentage cannot establish your actual replacement cost.
The IRS describes self-employment tax as a calculation involving net earnings and applicable rules. Do not subtract a headline rate from every dollar of contract revenue and call the result take-home pay.
Worked comparison with an explicit allowance
Use $100,000 employee salary and the $138,000 contract revenue above. An illustrative allowance of 25% of revenue leaves $103,500 of employee-equivalent gross value. That is $3,500 above salary under this simplified model, before a complete personal tax comparison.
The break-even hourly rate is $100,000 / (40 × 46 × 0.75) = $72.46. If only 30 hours are billable each week, it rises to $96.62. Neither is a market rate or recommended minimum; both follow from the inputs.
Avoid double-counting
If an allowance already includes replacing retirement or insurance benefits, do not add the same amount to the salary target again. If you itemize costs, replace the broad allowance with those items. The advanced controls in the contractor calculator separate percentage allowances from fixed annual costs.
Check non-price terms
Compare payment timing, reliable billable hours, equipment costs, cancellation terms and scope. A good annual revenue estimate can conceal a cash shortage before payment. Use the runway calculator to inspect available cash separately.
Continue to the contractor markup guide for the equation, or billable hours and payment gaps for budget-first pricing. Employment classification and tax treatment require their own assessment.