Contractor vs Employee Cost Comparison

Why Compare Contractor vs Employee Costs?

Hiring decisions involve more than just comparing salaries to hourly rates. Employees come with hidden costs like payroll taxes, benefits, and retirement contributions that can add 20-40% on top of base salary. Contractors may charge higher hourly rates but don't require benefits or employer-side taxes. This calculator helps you see the true total cost of each option.

Employee Cost Components

• Base Salary: The annual salary paid to the employee before any additions.
• Annual Bonus: Variable pay, commissions, or expected bonus amounts.
• Payroll Taxes: Employer-side taxes like Social Security and Medicare (FICA in the US, typically 7.65% of wages).
• Benefits: Health insurance, dental, vision, life insurance, and other employer-paid benefits.
• Retirement Match: Employer contributions to 401(k) or other retirement plans.
• Other Costs: Equipment, training, office space, software licenses, and other per-employee overhead.

Contractor Cost Components

• Hourly Rate: The rate charged by the contractor per hour of work.
• Hours per Week: Expected weekly engagement level (can be part-time or full-time).
• Weeks per Year: Total weeks the contractor is expected to work (accounting for gaps, vacations).
• Other Costs: Any additional costs like software licenses, equipment, or management overhead.

Beyond the Numbers

Cost is only one factor in the contractor vs employee decision. Consider these additional factors:

• Control & Flexibility: Employees are under direct supervision; contractors have more autonomy.
• Availability: Employees are typically dedicated; contractors may have multiple clients.
• Legal Classification: Misclassifying workers can lead to significant penalties.
• Intellectual Property: Employee work typically belongs to the company; contractor IP may require explicit agreements.
• Long-term Investment: Employees can grow with the company; contractors may leave when the project ends.