A contractor charging $70 an hour looks expensive next to an $80,000 salary, which works out to about $38 an hour. But that comparison leaves out most of what an employee costs, and it compares paid hours with worked hours.
What an employee really costs
- Employer payroll taxes: social security, national insurance or similar contributions.
- Benefits: health cover, pension contributions, and other perks.
- Other costs: equipment, software, workspace, training, and recruiting spread over the years the person stays.
- Paid time off: an employee is paid for about 2,080 hours a year but works roughly 1,700 to 1,850 after holidays and leave.
Comparing on the same hours
The fair comparison is cost per productive hour. Divide the employee's full yearly cost by the hours of work you actually need; that is the break-even contractor rate.
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
Here the employee costs 1.38 times salary, and the break-even contractor rate is $61.11. At $70 an hour, the contractor costs $16,000 more for a full year of work.
When the contractor still wins
The picture flips when you need fewer hours. For a six-month project or a part-time role, you pay the contractor only for the hours used, while hiring brings recruiting costs, notice periods and a commitment you may not need.
Tip: Check classification rules before keeping a contractor full-time for years. Many countries treat long-term, employee-like contractors as employees, with back taxes and penalties.