The $50/hour contractor sounds expensive until you load benefits onto the $100,000 salary. The $100,000 salary sounds affordable until you calculate the loaded cost. Most employers underestimate total employee cost by 25-40%.
Here's the full math for both sides of the equation.
The True Cost of an Employee
Base salary: $100,000
| Cost component | Amount | % of salary |
|---|---|---|
| Base salary | $100,000 | 100% |
| Payroll taxes (FICA, FUTA, SUTA) | $8,500 | 8.5% |
| Health insurance (employer share) | $7,200 | 7.2% |
| Dental + vision | $1,200 | 1.2% |
| 401(k) match (4% typical) | $4,000 | 4.0% |
| PTO cost (15 days = 6% of year) | $6,000 | 6.0% |
| Office space per employee | $6,000 | 6.0% |
| Equipment (amortized) | $2,500 | 2.5% |
| Training and development | $1,500 | 1.5% |
| Total loaded cost | $136,900 | 136.9% |
A $100,000 base salary costs the employer $136,900/year — and this is a conservative estimate. Companies with generous benefits (20+ PTO days, strong 401k match, premium health plans) often hit 150-160% of base.
Effective hourly rate: $136,900 ÷ 2,080 hours = $65.82/hour
The True Cost of a Contractor
A contractor at $75/hour who works 40 hours/week, 50 weeks/year:
| Component | Amount |
|---|---|
| Hourly billing | $75/hr |
| Weeks worked (50) | × 2,000 hours |
| Annual cost | $150,000 |
No benefits, no PTO (they don't get paid for vacation), no payroll taxes, no equipment typically, no training budget.
Effective hourly cost: $75/hour (what you pay is what you pay)
The Breakeven Analysis
| Work hours per year | $65.82/hr employee total | $75/hr contractor total | Cheaper option |
|---|---|---|---|
| 500 (part-time) | $32,910 | $37,500 | Employee |
| 1,000 | $65,820 | $75,000 | Employee |
| 1,500 | $98,730 | $112,500 | Employee |
| 1,800 | $118,476 | $135,000 | Employee |
| 2,080 (full-time) | $136,916 | $156,000 | Employee |
At every annual hour level, the employee is cheaper when the contractor rate is $75/hour. The breakeven contractor rate vs. a $100K employee:
$136,900 ÷ 2,080 hours = $65.82/hour
Any contractor billing over $65.82/hour is more expensive than the equivalent full-time hire for full-time work.
When Contractors Are Worth the Premium
Flexibility premium: You can ramp up/down instantly. No severance, no HR process. For project-based work or uncertain revenue, this flexibility has real economic value.
Specialization: A fractional CFO at $200/hour for 10 hours/month ($2,000/month) vs. a full-time CFO at $200,000/year ($16,667/month). For a company not ready for a full-time CFO, the contractor is the only option.
Risk reduction: A bad employee hire costs $25,000-50,000 in recruiting and productivity loss. A bad contractor engagement ends in 30 days.
No overhead commitment: When work is seasonal or project-based, you pay only for what you need.
From the Contractor's Perspective
A contractor billing $75/hour needs to account for:
| Cost component | Annual amount |
|---|---|
| Self-employment tax (15.3% on 92.35% of net) | $10,600 |
| Health insurance (self-pay) | $7,200-15,000 |
| Retirement savings (no employer match) | $6,000-10,000 |
| Business expenses | $3,000-8,000 |
| Income gaps (not always billable) | Variable |
At $75/hr × 1,800 billable hours = $135,000 gross. After all overhead: $95,000-110,000 take-home — roughly equivalent to a $120,000-130,000 employee salary.
The contractor premium is real but smaller than it appears.
Use the Contractor vs. Employee Calculator to compare the true cost for your specific situation.