Contractor vs Employee Cost — True Annual Comparison

An employee's salary is not their cost

A $80,000 salary does not cost your business $80,000. On top of it sit employer payroll taxes and mandatory contributions, health cover, any retirement matching, paid leave — which means you pay for more days than are worked — equipment, software seats, and a share of general overhead.

The tool models all of that as a single benefits load percentage, defaulting to 25%. At that setting an $80,000 salary becomes $100,000 of fully-loaded cost. The right figure for your organisation depends on jurisdiction and on what you actually provide, so treat 25% as a starting point rather than a constant and adjust it.

The comparison people get wrong

A contractor at $75 an hour for 1,600 hours is $120,000 — which looks 50% more expensive than the salary and is not.

The error is comparing a contractor's rate against an employee's salary rather than their loaded cost. The contractor's rate has to cover their own taxes, insurance, equipment, unpaid time between engagements and their own overhead — all things you absorb for an employee. Against the $100,000 loaded figure the gap narrows sharply, and at those inputs the break-even lands at roughly 1,333 hours a year. Below that the contractor costs less; above it the employee does.

Utilisation usually matters more than the rate

The larger factor is what you pay for. A contractor bills only for hours delivered. An employee is paid through quiet periods, holidays, sick leave and ramp-up — which is entirely reasonable and also means the effective cost per productive hour is higher than the arithmetic suggests.

So for genuinely intermittent work, a contractor at a much higher rate can still be cheaper, because you pay nothing in the months you do not need them. For continuous work across a full year the position reverses, since the utilisation gap closes and the rate difference is all that remains.

What the model cannot price

Worth stating plainly, because a cost calculator invites more confidence than it deserves. Institutional knowledge, availability, and the cost of onboarding someone new each time are real and resist quantification. A model answers "what does each option cost" — a narrower question than "which should I hire".

Classification is not a choice you get to make

Worker classification is determined by the substance of the working relationship, not by the label on the contract or by mutual agreement. This is the part with actual consequences, so it deserves more attention than the arithmetic.

Authorities look at how the relationship really operates: how much control is exercised over how and when the work is done, whether the person is integrated into the organisation, whether they are free to work for others, who supplies the tools, and whether the arrangement is open-ended. Someone labelled a contractor but managed as an employee is misclassified, and that assessment is made after the fact — often years later, and often triggered by the worker themselves.

The consequences are asymmetric and land on the engager: back taxes, unpaid entitlements, penalties and interest, and in some jurisdictions personal liability for directors. Set against that exposure, the saving from misclassifying is small.

Tests differ substantially between countries and frequently between states or provinces within one. This is general information and a cost-modelling tool, not legal, tax or employment advice, and it does not determine anyone's employment status. Anyone making a real hiring decision, or unsure how an existing arrangement would be assessed, should take advice from an employment lawyer or accountant in the relevant jurisdiction.

The comparison only holds if the employee side includes everything, not just salary. Build that figure properly with the total compensation builder before setting it against a contractor rate.