Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Worker classification is a legal and factual question decided by how the work relationship actually operates, control, independence, exclusivity, not a cost comparison a business gets to choose based on which option comes out cheaper in a spreadsheet.
Before you rely on it
What to check
Evaluate the actual working relationship against the legal classification factors first, and treat any cost comparison as relevant only after the legal classification question is settled, not instead of it.
The common error
Where people go wrong with contractor vs. employee cost calculator
Choosing worker classification based on which option this calculator shows as cheaper. Classification follows the legal facts of the relationship; getting it wrong risks real penalties regardless of which structure looked more economical.
Sensitivity evidence
How employee salary changes the contractor cost advantage
| Employee salary | Contractor cost advantage | Loaded employee cost | Contractor annual cost |
|---|---|---|---|
| $72,000 | -$32,400 | $103,600 | $136,000 |
| $81,000 | -$20,700 | $115,300 | $136,000 |
| $90,000worked example | -$9,000 | $127,000 | $136,000 |
| $99,000 | $2,700 | $138,700 | $136,000 |
| $108,000 | $14,400 | $150,400 | $136,000 |
Every input, tested
Which input moves the contractor cost advantage most
| Input | Tested from | To | Contractor cost advantage at each end | Swing |
|---|---|---|---|---|
| Annual contractor hours | 1440.0 hours | 1760.0 hours | $4,600 to -$22,600 | $27,200 (302%) |
| Contractor hourly rate | $77 | $94 | $3,800 to -$23,400 | $27,200 (302%) |
| Employee salary | $81,000 | $99,000 | -$20,700 to $2,700 | $23,400 (260%) |
| Payroll tax and benefit burden | 28.0% | 32.0% | -$10,800 to -$7,200 | $3,600 (40%) |
| Employee equipment and overhead | $9,000 | $11,000 | -$10,000 to -$8,000 | $2,000 (22%) |
Two variables at once
Contractor cost advantage by employee salary and payroll tax and benefit burden
| Employee salary \ Payroll tax and benefit burden | 26.0% | 30.0% | 34.0% |
|---|---|---|---|
| $72,000 | -$35,280 | -$32,400 | -$29,520 |
| $81,000 | -$23,940 | -$20,700 | -$17,460 |
| $90,000 | -$12,600 | -$9,000 | -$5,400 |
| $99,000 | -$1,260 | $2,700 | $6,660 |
| $108,000 | $10,080 | $14,400 | $18,720 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Employee salary | $90,000 |
| Payroll tax and benefit burden | 30.0% |
| Employee equipment and overhead | $10,000 |
| Contractor hourly rate | $85 |
| Annual contractor hours | 1600.0 hours |
| Contractor cost advantage | -$9,000 |
| Loaded employee cost | $127,000 |
| Contractor annual cost | $136,000 |
Where the inputs come from
Employee salary is the base pay, the burden percentage covers employer payroll taxes, benefits, insurance and paid leave, and employee equipment and overhead includes the computer, workspace and software. The contractor hourly rate and annual hours give the contractor's total fee. Use the hours you expect to actually need, since a contractor is paid for hours worked while an employee is paid for the year, including slack.
Using the contractor cost advantage in a real decision
Also weigh control, training and the risk of misclassifying workers.
When the result stops applying
Worker classification is a legal question, not a preference: if the person works under your direction, at your hours, with your tools, the IRS or state agencies can treat them as an employee, with back taxes and penalties for misclassification. The model excludes recruiting, management time, ramp-up, turnover and the value of institutional knowledge. Contractors may also charge extra for rush work.
What to compare it with
See the full first-year employee cost with the employee cost calculator, and the employee turnover page for the cost of losing staff. The break-even and profit goal calculators show whether the work justifies either option. Consult an employment lawyer or accountant on classification before relying on a contractor.
People also ask
Frequently asked questions
How does the IRS decide if someone is a contractor?
By the degree of control over behavior, financial control and the relationship, looking at who directs the work, who supplies tools and whether the person works for others.
What happens if I misclassify an employee?
You can owe back payroll taxes, penalties and unpaid benefits, and state agencies may add fines, so classification should be reviewed carefully.
When is a contractor cheaper?
For part-time, project-based or specialized work where you need fewer hours than a full-time employee and do not need to pay benefits or carry idle time.