Contractor & Freelance Economics

The Real Math Behind Going Freelance

The most common mistake people make when switching from employment to freelancing is comparing their current salary directly to a contract rate. A $50/hour contract looks better than a $90,000 salary — until you factor in self-employment taxes, health insurance, unpaid time off, and gaps between projects.

In practice, a freelancer needs to charge 30% to 50% more per hour than the equivalent employee rate just to break even. This is known as the freelance premium, and it exists because employees receive invisible compensation that contractors must fund themselves.

What the Freelance Premium Covers

Hidden Cost	Typical Annual Value
Self-employment tax (employer portion)	7.65% of income
Health insurance	$5,000–$15,000
Paid time off (vacation, sick days)	$4,000–$10,000
Retirement matching	$2,000–$8,000
Revenue gaps between contracts	4–12 weeks of lost income

Which Tool Should You Use?

Start with the Contractor vs Employee calculator to see the side-by-side comparison of a salaried position against a contract rate. Then use the Freelance Rate Calculator to determine the minimum hourly rate you need to match your current total compensation. Finally, run the Freelance Risk Calculator to price in the uncertainty of variable income and gaps between projects.

For the full framework behind these calculations, read our guides on how much more a contractor should charge and how to price freelance risk.