Employee vs Contractor Cost Calculator

Compare the true annual cost of an employee — salary plus benefits plus payroll burden — with what a contractor actually bills for the same work.

Figures checked against 2026 IRS limits · Reviewed September 2026

What fully burdened really means

An employee's salary is only part of what the company pays. The fully burdened cost — sometimes called the fully loaded cost — adds benefits and the employer's share of payroll taxes on top of wages. The U.S. Bureau of Labor Statistics Employer Costs for Employee Compensation release for March 2026 puts private-industry compensation at $46.60 per hour worked: $32.60 in wages and salaries plus $14.01 in benefits, meaning benefits alone are about 30% of total employer cost. That is why finance teams routinely apply a fully burdened multiplier of 1.25x to 1.4x base salary when they budget headcount. The individual pieces behind that multiplier: employer FICA at 7.65% of wages, FUTA and SUTA unemployment taxes adding roughly 2–3%, and workers' compensation insurance typically 1–2%. Stack those on a salary, add health insurance, retirement matching, and paid time off, and the "cheap" $85,000 role quickly becomes a six-figure line item.

Why contractors quote a higher hourly rate

Contractors who appear expensive per hour are often priced sanely per year. A salaried employee receives paid vacation, sick days, and holidays; employer-paid health premiums; a retirement match; and unemployment coverage they can claim between jobs. A contractor receives none of that. They pay both halves of Social Security and Medicare (15.3% self-employment tax), buy their own health insurance, fund their own retirement, carry gaps between engagements, and pay for their own software, hardware, and professional liability coverage. If an employee's benefits stack is worth roughly $14 an hour by the BLS numbers above, a contractor must charge at least that much extra before earning a dollar of profit. The calculator shows the annual picture: at the default inputs the contractor bills $96,750 a year while the employee costs $113,500 — yet the freelancer must self-fund every benefit out of that $96,750.

Compliance: employee or independent contractor?

Cost is not the only input — classification is a legal question first. The IRS applies the common-law control test, often summarized as the 20-factor test in Publication 15-A, organized today into three categories: behavioral control (does the company direct how the work is done?), financial control (who provides tools, sets payment terms, and can profit or lose?), and the type of relationship (contracts, benefits, permanence). The IRS explains the framework on its Independent contractor (self-employed) or employee? page. Many states apply the stricter ABC test, which presumes employment unless the hiring entity proves all three prongs: the worker is free from control, performs work outside the usual course of the business, and is customarily engaged in an independently established trade of the same type. The U.S. Department of Labor uses an economic-reality test under the Fair Labor Standards Act — see DOL Fact Sheet 13. Misclassifying an employee as a contractor can trigger back payroll taxes, interest, and penalties, so treat this calculator as education only — not legal or tax advice — and confirm status with a professional or IRS Form SS-8 when the facts are genuinely mixed.

How the calculator works

Employee cost = salary + benefits + (salary x payroll burden %). Contractor cost = hourly rate x hours per week x 50 weeks + annual expenses. The 50-week assumption leaves two weeks unbilled for the contractor's own admin and time off; change the hours field to model different engagement levels. The difference is contractor minus employee: a negative number means the contractor route is cheaper in cash for the company this year. Defaults: $85,000 salary, $20,000 benefits, 10% burden (roughly FICA plus unemployment and workers' comp), $75/hour at 25 hours a week, $3,000 expenses → employee $113,500 vs contractor $96,750, a $16,750 gap. Run your own numbers above, then read the employee vs contractor cost guide for the full worked example and red flags.

Default comparison: $85,000 employee vs $75/hour contractor
EngagementMathAnnual cost
Employee$85,000 + $20,000 + 10% burden$113,500
Contractor$75 × 25 × 50 + $3,000$96,750
Gap$113,500 − $96,750$16,750

Every figure above is hand-checked: the worked example was recomputed independently of the calculator code, and tax figures track 2026 IRS limits. How we check every page.

Related tools

Converting a salary the other direction? Use the contract rate converter to turn a salary into an equivalent hourly or day rate. Quoting fixed-fee work? The hourly rate calculator builds a rate from income, expenses, and tax, and the day rate converter maps day rates to hourly ones using real working time rather than a naive eight-hour divide.

Frequently Asked Questions

Is it cheaper to hire a contractor?

Sometimes, but not automatically. With the default inputs the contractor route costs $96,750 a year versus $113,500 for the employee — $16,750 less in cash for the company. That gap shrinks or vanishes when the role needs full-time hours, when benefits are richer, or when contractor rates rise to cover the freelancer's own health insurance and retirement. Contractors are usually cheapest for scoped, variable, or specialist work; employees are usually cheaper for ongoing core work at 40 hours a week. Misclassification risk can also turn "savings" into back taxes and penalties.

What is the true cost of an employee?

Salary plus benefits plus employer payroll taxes. The BLS March 2026 ECEC reports private-industry compensation of $46.60 per hour worked — $32.60 in wages and $14.01 in benefits — so benefits alone run about 30% of total cost. Employer FICA adds 7.65% of wages, FUTA/SUTA roughly 2–3%, and workers' compensation 1–2%. In practice most budget models apply a fully burdened multiplier of 1.25x–1.4x base salary; an $85,000 salary with $20,000 of benefits and a 10% payroll burden costs $113,500.

Why do contractors charge more per hour?

Because a contractor's hourly rate funds everything an employer would otherwise provide: both halves of Social Security and Medicare (15.3% self-employment tax), health insurance, retirement contributions, paid time off, unemployment insurance they cannot claim, plus software, equipment, and gaps between contracts. If benefits are worth about $14 an hour by BLS figures, a contractor charging 30–50% above a salaried equivalent hourly rate may still net less than the employee takes home — the higher quote reflects risk and self-funded benefits, not just profit.

What are misclassification red flags?

Watch for behavioral control (the company dictates schedule, methods, and tools), exclusivity (one client is effectively the only income source), a regular full-time schedule with ongoing duties, and use of employer email, devices, or badges. The IRS common-law control test (the 20-factor tradition in Publication 15-A) and the DOL economic-reality test both weigh these facts; many states apply an ABC test requiring all three prongs — free from control, outside the usual course of business, and independently established in the same trade. When in doubt, document the facts or file IRS Form SS-8.

Is it cheaper to hire an employee or a contractor?

Sometimes, but not automatically. At the defaults the contractor bills $96,750 a year while the employee costs $113,500 — $16,750 less in cash for the company. The gap shrinks when the role needs full-time hours or contractor rates rise to cover health insurance and retirement. Contractors suit scoped or variable work; employees suit ongoing core work at 40 hours a week.