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Compensation
Contractor vs Employee Cost
True loaded cost: payroll tax, benefits, equipment.
Company — employee cost
⚠ Worker classification matters. The IRS, DOL, and many states (CA AB5, NJ, MA) presume "employee" unless you can prove an independent contractor relationship. Misclassification = back taxes, penalties, lawsuits. Consult counsel before treating long-term FT workers as 1099.
Company — contractor cost
Personal — contractor take-home
Employee — fully loaded cost
$182,703
salary + FICA + benefits + equip
Contractor — gross cost
$163,200
85/hr × 40 × 48 wks
Company saves with contractor
$19,503
contractor cheaper for co.
Effective employee $/hr
$95
From the person's wallet
Employee take-home
$81,322
at $120,000 salary
Contractor take-home
$100,525
at $85/hr
Self-employment tax (15.3%)
$23,059
½ deductible: $11,530
QBI deduction (20%)
$28,054
Sec 199A, simplified
Federal income tax
$16,529
State income tax
$11,687
CA
💡 Break-even rate: $69/hr — the contractor rate where take-home matches the $120,000 W-2 offer (factoring in SE tax, own benefits, QBI).
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About
The true loaded cost of a US employee vs an equivalent contractor. Includes employer payroll tax, benefits load, and equipment so you can decide which is cheaper for the role.
How it works
- 01Employee total = base + 7.65% employer FICA + benefits% × base + equipment.
- 02Contractor total = hourly rate × hours × 52.
- 03Effective employee hourly = employee total / 2,080 hours.
Examples
Mid-level engineer
$120k base, 20% benefits, $3k equipment = ~$143k loaded. Contractor at $85/hr × 40hr × 52 = $176k. Employee is cheaper here.
Short-term specialist
Need 3 months of design work? A $150/hr contractor at 20hr/week costs $39k vs. a full-time $130k hire. Contractor wins on flexibility AND price.
FAQ
What benefits % should I use?+
15–25% for early-stage startups (basic health, no 401k match). 25–40% for late-stage or BigTech.
Are contractors really cheaper?+
Sometimes. They cost more per hour but you skip taxes, benefits, equipment, and severance. For variable workloads, almost always cheaper.
What about misclassification risk?+
If a contractor works full-time for one client, follows your direction, and uses your tools, they may legally be an employee. AB5 in California is strict — get legal advice.