Employee vs contractor — the true cost comparison matters more than the stated rate or salary. A $70,000/year employee actually costs $90,000–100,000+ when you include payroll taxes, benefits, and overhead. This calculator shows you the all-in cost for both hiring models.
Employee Costs
Contractor Costs
Full-time employee = ~2,080 hours. Contractors often billed 1,200–1,800 hrs.
If placed through a staffing agency, add their markup (typically 15–30%).
Note: No payroll taxes, benefits, unemployment insurance, or workers' comp on contractors. Risk: misclassification penalties if the IRS determines workers are employees.
Cost Breakdown Comparison
| Cost Item | Employee | Contractor |
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How to Use the Employee vs Contractor Cost Calculator
Understanding the true all-in cost of each hiring model is essential for making the right staffing decision. This calculator goes beyond the headline salary or hourly rate to show the complete picture.
Step 1: Enter Employee Costs
Enter the annual salary and all associated costs: health insurance (employer portion is typically $7,000–$15,000/year for single coverage), 401k match (commonly 3–6%), PTO plus holidays (15–25 days is typical), equipment and software licensing, and office/overhead allocation per employee.
Step 2: Enter Contractor Costs
Enter the contractor's hourly rate and estimated annual hours. Note that contractors typically charge higher hourly rates (often 1.5x–2x a comparable employee's hourly equivalent) because they cover their own taxes and benefits. If you use a staffing agency, add their markup (15%–30%). You pay no payroll taxes, benefits, or workers' comp on true contractors.
Step 3: Compare Cost Per Productive Hour
The cost per productive hour is the most useful comparison metric. Employees have paid non-working time (PTO, holidays, sick days), so their effective productive hours are less than 2,080 per year. A $70,000 employee working 1,880 productive hours with $25,000 in overhead costs $50/hour. A $75/hour contractor working 1,500 hours costs $75/hour — but may not need benefits, equipment, or office space.
When to Choose Each Model
Choose employees for: core long-term roles requiring institutional knowledge, full-time consistent workload, roles requiring direct supervision or management of sensitive data. Choose contractors for: project-based work with defined endpoints, specialized expertise needed short-term, variable workload where full-time commitment isn't needed, or to quickly scale without long-term commitment. Misclassifying employees as contractors can result in significant IRS penalties — consult legal counsel if uncertain.
FAQ
Is this employee vs contractor calculator free?
Yes, completely free with no signup required. All calculations run in your browser.
Is my data private?
Absolutely. Everything runs client-side in your browser. No data is transmitted or stored.
What is the true cost of an employee?
The true all-in cost of an employee is typically 1.25x–1.4x their base salary when you include employer payroll taxes (FICA ~7.65%), health insurance (~$7,000–15,000/year), retirement matching (3–6% of salary), paid time off (equivalent to 15–25 days of pay), equipment, software, and overhead. A $70,000 salary employee typically costs $90,000–$100,000 or more per year.
Why do contractors cost more per hour but less overall?
Contractors charge higher hourly rates to cover their own taxes (self-employment tax is ~15.3%), benefits, equipment, and business expenses that employees receive from employers. However, you only pay contractors when work is needed — no idle time, no benefits during downtime, no unemployment insurance when the project ends. For project-based or variable-demand work, contractors are often cheaper in total.
What is the 'benefit multiplier' for employees?
The benefit multiplier accounts for paid time off, holidays, sick days, and other non-working paid time. If an employee works 2,080 hours per year (52 weeks × 40 hours) but gets 15 PTO days + 10 holidays = 200 paid non-working hours, their effective working hours are 1,880. The cost per productive hour is higher than the hourly rate because you pay for hours not worked.