Work guide
Contractor vs employee: the true cost most teams miss
Hiring debates often compare a contractor’s hourly rate to an employee’s salary line item. That comparison is incomplete. Employers pay payroll taxes, benefits, equipment, management time, and paid non-billable hours for employees—while contractors price risk, downtime, and self-employment tax into their rate.
Updated 2026-09-05
Build a fully loaded employee cost
Start with base salary, then add employer payroll taxes, health insurance contribution, retirement match, paid time off, equipment, software licenses, and recruiting amortization. For many US knowledge roles, fully loaded cost lands roughly 1.25×–1.45× salary.
Example: a $100,000 salary at 1.35× burden is about $135,000 per year. Divided by ~1,800 productive hours (after PTO, meetings, and admin), the internal hourly cost is closer to $75—not $48.
Translate contractor rates fairly
A contractor at $95/hour for 20 hours/week is $98,800/year in fees—but you are not paying benefits, and you can stop the engagement. You also absorb less idle time if the work is project-shaped.
If the role needs full-time presence, culture ownership, and long-term product context, employment often wins even when the sticker rate looks higher. If the work is bursty or specialized, contracting often wins.
Decision checklist
Use both cost and control:
- Need IP ownership and daily collaboration? Lean employee.
- Need a specialist for 6–12 weeks? Lean contractor.
- Unsure of scope? Time-box a contractor pilot before opening a req.
- Always compare annualized fully loaded cost for the same output hours.
Key takeaways
- Never compare salary to contractor rate without burden and productive hours.
- Contracting buys flexibility; employment buys continuity and ownership.
- Run the numbers for your actual hours of needed coverage.