Contract vs Hourly Calculator
Compare true costs of contract and hourly employment models
Legal Disclaimer: This calculator provides estimates only. Consult with an HR specialist or employment attorney to understand tax and legal implications of different employment arrangements.
Insight: The true cost of a W-2 employee is typically 1.25-1.4x their base salary when you factor in benefits and taxes. Contractors may appear cheaper but consider availability and quality control.
Contractor Details
Employee Details
Advanced Options
Adjust if contractors are more/less efficient than employees
Recruiting, onboarding, and training costs
Cost Comparison
Recommendation: Consider both options based on your needs
Key Considerations:
- Contractors offer flexibility but less control
- Employees provide continuity but higher fixed costs
When to Choose Contract vs. Hourly
Contractor Advantages
- No payroll taxes or benefits costs
- Easier to scale up/down quickly
- Access specialized skills for short-term needs
- Lower commitment for project-based work
Employee Benefits
- Greater control over work and schedule
- More commitment and loyalty
- Easier knowledge retention
- Better for core business functions
"Businesses using our calculator discover that for roles needed more than 20 hours/week for over 6 months, employees often provide better long-term value despite higher upfront costs."
Hidden Costs Comparison
| Cost Factor | Contractor | Employee |
|---|---|---|
| Payroll Taxes | None | 7.65% + state taxes |
| Benefits | None | 15-30% of salary |
| Equipment/Software | Usually provided | $2,000-$5,000/year |
| Management Time | Low (self-managed) | 10-20% of cost |
Note: Misclassifying employees as contractors can result in significant penalties. Ensure workers meet IRS guidelines for contractor status.
Frequently Asked Questions
What percentage should I use for benefits and taxes?
Typical benefits and taxes add 25-40% to base salary:
- 7.65% for employer payroll taxes (FICA)
- 2-10% for state unemployment insurance
- 15-25% for health insurance, retirement, and other benefits
- 3-5% for workers compensation insurance
How does overtime affect the comparison?
Non-exempt employees receive 1.5x pay for hours over 40/week, significantly increasing costs for overtime work. Contractors typically charge the same rate regardless of hours, making them potentially cheaper for surge workloads.
Should I consider contract-to-hire arrangements?
Contract-to-hire can be an excellent middle ground, allowing you to:
- Evaluate skills and cultural fit before committing
- Spread out recruiting costs
- Smooth the transition into a full-time role
How do I account for contractor availability?
Contractors often work with multiple clients, so their availability may fluctuate. Consider:
- Building exclusivity clauses into contracts (with higher rates)
- Scheduling key work during guaranteed availability periods
- Maintaining a bench of backup contractors
What about intellectual property rights?
Employees typically assign all IP to employers automatically. With contractors, ensure your agreement includes:
- Explicit IP assignment clauses
- Work-for-hire provisions
- Non-compete/non-solicitation terms where enforceable