Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A contractor's rate has to fund things a salary quietly bundled in for free: the employer's half of payroll tax, health insurance, retirement contributions, paid time off, and the unbilled hours spent finding and managing the next contract. A rate that just matches a prior salary divided by hours worked ends up funding a lower real income once all of that gets paid for out of pocket.
Before you rely on it
What to check
List every benefit and cost the old salary covered, price each one individually, and add the total to the base compensation before converting to an hourly figure.
The common error
Where people go wrong with contractor rate calculator
Setting a contractor rate by simply converting a former salary to an hourly number. That number was never meant to also cover benefits, self-employment tax and unbilled business time, all of which now come out of the same rate.
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
Enter the annual salary you would accept as an employee, the value of benefits you must now buy yourself, your yearly business overhead and a buffer for taxes and profit. The billable hours figure is the number of hours you expect to invoice, not the hours you work. If you are moving from a corporate job, add up the cost of health insurance, the retirement match you will lose and vacation you will pay for out of your own pocket. Ask what rates similar contractors charge.
Using the required hourly rate in a real decision
A rate is also the anchor for negotiating project fees.
When the result stops applying
The result depends on realistic billable hours and a market that will pay the rate. A contract with regular hours and a single client is more stable than project work, and clients who control your schedule may make you an employee for legal purposes. Some contracts pay for hours, others for deliverables, which changes the effective rate.
What to compare it with
See the same math on the freelance hourly rate and benefits gap calculators, and compare with employment on the W-2 versus 1099 page. The billable hours and project profitability pages help with utilization and pricing. Quarterly tax and safe harbor calculators help set aside the tax.
People also ask
Frequently asked questions
How do I convert a salary to a contractor rate?
Add benefits, overhead and taxes to the target salary and divide by billable hours. Contractor rates are usually 1.5 to 2 times the equivalent salary rate.
What is a typical markup over an employee's hourly rate?
Commonly 30% to 100%, depending on benefits, how steady the work is and how many hours you can bill.
Should I raise my rate over time?
Yes. Review it each year and raise it as your skills and demand grow, or when your costs rise.