Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A salaried job's stated pay is only part of total compensation, and comparing that number directly to a freelance rate leaves out everything the employer was quietly covering: health insurance, a retirement match, paid time off, payroll taxes split with the employer. The freelance rate needed to actually replace a salary is reliably higher than the raw salary number alone suggests, once every one of those pieces gets priced separately and added back in.
Before you rely on it
What to check
Price each benefit individually, insurance premium, retirement match percentage, actual paid-leave days, rather than applying one rough multiplier to the base salary.
The common error
Where people go wrong with freelancer benefits gap calculator
Comparing a freelance day rate directly against an annualized salary divided by working days. That comparison omits benefits, employer payroll tax and unpaid non-billable time, understating what the freelance rate actually needs to cover.
Sensitivity evidence
How target employee-equivalent salary changes the required hourly rate
| Target employee-equivalent salary | Required hourly rate | Required annual revenue |
|---|---|---|
| $72,000 | $104 | $125,350 |
| $81,000 | $113 | $135,700 |
| $90,000worked example | $122 | $146,050 |
| $99,000 | $130 | $156,400 |
| $108,000 | $139 | $166,750 |
Every input, tested
Which input moves the required hourly rate most
| Input | Tested from | To | Required hourly rate at each end | Swing |
|---|---|---|---|---|
| Annual billable hours | 1080.0 hours | 1320.0 hours | $135 to $111 | $25 (20%) |
| Target employee-equivalent salary | $81,000 | $99,000 | $113 to $130 | $17 (14%) |
| Additional tax/profit buffer | 13.0% | 17.0% | $120 to $124 | $4.23 (3.5%) |
| Annual benefits to replace | $19,800 | $24,200 | $120 to $124 | $4.22 (3.5%) |
| Annual business overhead | $13,500 | $16,500 | $120 to $123 | $2.88 (2.4%) |
Two variables at once
Required hourly rate by target employee-equivalent salary and annual benefits to replace
| Target employee-equivalent salary \ Annual benefits to replace | $17,600 | $22,000 | $26,400 |
|---|---|---|---|
| $72,000 | $100 | $104 | $109 |
| $81,000 | $109 | $113 | $117 |
| $90,000 | $117 | $122 | $126 |
| $99,000 | $126 | $130 | $135 |
| $108,000 | $135 | $139 | $143 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Target employee-equivalent salary | $90,000 |
| Annual benefits to replace | $22,000 |
| Annual business overhead | $15,000 |
| Additional tax/profit buffer | 15.0% |
| Annual billable hours | 1200.0 hours |
| Required hourly rate | $122 |
| Required annual revenue | $146,050 |
Where the inputs come from
Target employee-equivalent salary is the pay you would want in a salaried job. Annual benefits to replace is the total you must now buy: health insurance premiums, retirement contributions, paid time off, disability and life insurance. Annual business overhead is your running costs, and the tax and profit buffer covers self-employment tax and a margin. Get real quotes for health insurance, the largest item, from the marketplace or your professional association.
Using the required hourly rate in a real decision
Consider keeping some employment income while you build.
When the result stops applying
Benefits vary widely and some are hard to price, such as job security and employer-paid training. The calculation uses billable hours as the driver, and if you cannot fill them, the shortfall is yours. A spouse's health plan or a part-time job with benefits changes the gap. Tax deductions for the self-employed, such as the health insurance deduction, reduce the effective cost.
What to compare it with
Convert the revenue into a rate with the freelance hourly rate and contractor rate calculators, and compare employment on the W-2 versus 1099 page. The emergency fund and unemployment runway calculators show how large a cushion to hold. The solo 401(k) page shows retirement savings options for the self-employed.
People also ask
Frequently asked questions
What benefits do freelancers have to replace?
Health insurance, retirement contributions, paid time off, disability and life insurance, and the employer half of payroll taxes.
How big is the benefits gap typically?
Often 20% to 40% of salary, depending on how much health insurance costs and whether you have a spouse's plan.
Can the self-employed deduct health insurance?
Generally yes, as an adjustment to income if you are not eligible for an employer plan, which lowers the effective cost.