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Contractor vs Employee Cost Calculator

See the full employer cost of hiring a salaried employee versus a contractor, overhead included.

How it is calculated

The tool compares two yearly figures: employee cost = S × (1 + P ÷ 100) and contractor cost = R × H, where S is the annual salary, P is the overhead percentage (employer taxes, benefits, paid leave and other costs on top of salary), R is the contractor's hourly rate and H is the annual hours you need the work done. The difference is employee cost − contractor cost, so a negative difference means the employee is cheaper. The employee's effective hourly cost is employee cost ÷ H, using the same hours as the contractor. Hours must be above zero and the other inputs cannot be negative. Overhead varies by country and employer, so use your own figure.

Worked example

A role pays $80,000 a year with 30% overhead; a contractor charges $65 an hour for 1,800 hours. Employee: 80,000 × 1.30 = $104,000.00. Contractor: 65 × 1,800 = $117,000.00. Difference: 104,000 − 117,000 = -$13,000.00, so the employee is $13,000 cheaper. Spread over the same 1,800 hours, the employee costs 104,000 ÷ 1,800 = $57.78 an hour against the contractor's $65.

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Common mistakes

  • Entering the overhead as a multiplier (1.3) instead of a percentage (30); 1.3 would be treated as 1.3% overhead.
  • Comparing the salary alone with the contractor bill; the whole point is to add benefits, payroll taxes and paid time off to the salary first.
  • Using the same hours for both without thinking: an employee is paid for holidays and leave, while a contractor is billed only for hours worked, so the hours you need from each can differ.
  • Reading the negative difference backwards: it is employee minus contractor, so a negative number means hiring the employee costs less.
  • Ignoring costs the tool does not include, such as recruiting, equipment, a contractor's gap between projects or the legal risk of misclassifying a worker.

Sources

About this calculator

The true cost of a salaried employee extends well beyond their base salary to include employer payroll taxes (such as the employer's share of Social Security and Medicare in the US), benefits like health insurance and retirement matching, paid time off, and other overhead — collectively often called the burden rate, which commonly adds 1.25x to 1.4x on top of base pay. A contractor billed by the hour, by contrast, is paid only for hours worked, with no employer payroll tax or benefits obligation, but typically at a higher hourly rate to compensate for the lack of job security and benefits on the contractor's side.

Business owners, HR departments, and finance teams use this comparison when deciding how to staff a role — an ongoing, integral function is usually cheaper and more stable as an employee once overhead is included, while short-term or specialized project work is often cheaper as a contractor since there is no burden rate to carry between projects.

This calculator adds up the full employer cost of a salaried employee, including tax and benefit overhead, and compares it to the equivalent cost of hiring a contractor at an hourly rate, so you can see which option is genuinely cheaper for your business.

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