Dividing a salary by 2,080 hours gives a number far too low to live on as a contractor. An employee's salary comes with extras paid by the employer, and paid time off that contractors don't get.
Start from the employer's full cost
An employer pays payroll taxes, benefits and equipment on top of salary. The total is what a contractor has to earn to be in the same place.
Employee
$80,000 × (1 + 10% + 20%) + $6,000equals$110,000
Contractor
$70.00 × 1,800 hequals$126,000
Break-even rate
$110,000 ÷ 1,800 hequals$61.11
Difference
|$126,000 − $110,000|equals$16,000
The full cost is $110,000, 1.38 times salary. Spread over 1,800 productive hours, the break-even rate is $61.11 an hour, or about $489 for an 8-hour day.
Then add what contractors carry alone
- Gaps between contracts, which reduce billable hours below 1,800.
- Time spent finding work, invoicing and admin.
- Your own pension, insurance and professional costs.
For those reasons many contractors aim well above the break-even rate. A $61 break-even often becomes a $70 to $80 market rate.
Check from the client's side
At $55 an hour, the same client would pay $99,000 for 1,800 hours, $11,000 less than an employee. At $70 they pay $16,000 more. Knowing both numbers helps in rate negotiations.