What is Contractor vs Full-Time Cost?
The contractor vs full-time comparison evaluates the total cost of hiring a contractor/freelancer against employing a full-time equivalent for the same work. Contractors have higher hourly rates but no benefits, tax contributions, or overhead costs. The right choice depends on workload predictability, project duration, and required expertise. Calculate full employment costs with the Employee Cost Calculator and set freelance rates with the Freelancer Rate Calculator.
The Formula
Contractor Annual Cost = Hourly Rate × Hours per Week × Working Weeks Full-Time Annual Cost = Base Salary + Benefits + Employer Tax + Equipment + Overhead
Worked Example
A developer needed for ongoing work: contractor at $75/hour, 40 hours/week, 48 weeks vs full-time at $85,000 salary + 30% benefits/overhead.
- Contractor annual = $75 × 40 × 48 = $144,000
- Full-time annual = $85,000 × 1.30 = $110,500
- Difference = $144,000 − $110,500 = $33,500 more for contractor
- Break-even hours = $110,500 ÷ ($75 × 48) = 30.7 hours/week
📌 At 40 hours/week, full-time is $33,500/year cheaper. The contractor becomes more cost-effective below 31 hours/week, the break-even point for this rate comparison.
Why This Matters
Flexibility value
Contractors can be scaled up or down without the cost and complexity of hiring/firing. If your workload fluctuates 30%+ between quarters, the contractor premium is insurance against over-hiring during slow periods.
Hidden employment costs
A $85,000 salary costs the employer $110,000-125,000 after benefits (health insurance, pension, paid leave), employer taxes, equipment, office space, and HR administration. The "30% rule" is a useful approximation.
Worker misclassification risk
The IRS applies a 20-factor test to determine worker classification. Misclassifying an employee as a contractor exposes the company to back taxes, penalties of up to 100% of unpaid employment taxes, and potential lawsuits. As enforcement tightens, getting the classification right from day one protects against six-figure liabilities.
Common Mistakes
❌ Comparing hourly rate to salary equivalent
A contractor at $75/hour sounds expensive vs a $85K salary ($41/hour). But the employee actually costs $53/hour fully loaded, and the contractor covers their own benefits, taxes, and downtime. The real gap is $75 vs $53, not $75 vs $41.
❌ Ignoring ramp-up time differences
Experienced contractors hit productivity in 1-2 weeks. New full-time employees take 3-6 months to fully ramp up. If you need results quickly, the contractor's higher rate is offset by faster time-to-value.
❌ Not accounting for intellectual property ownership
Without a written agreement, contractors may retain ownership of work product under US copyright law. Full-time employees' work is automatically "work for hire." Ensure contractor agreements include explicit IP assignment clauses, or you may not own the deliverables you paid for.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| Contractor premium | 20-30% (justified by flexibility) | 30-50% | Above 60% |
| Break-even hours/week | Below 25 | 25-35 | Above 35, hire instead |
| Contractor retention rate (re-engagement) | 70%+ return for future projects | 40-70% | Below 40% |
Source: Bureau of Labor Statistics & SHRM Human Capital Report
Benchmark data sourced from Bureau of Labor Statistics & SHRM Human Capital Report.