The common framing — "contractors are expensive, employees are cheaper in the long run" — is often correct but requires careful math. Here's how to compare.
The Core Cost Equation
Employee total cost = salary × 1.25–1.40 (taxes + benefits)
Contractor cost = hourly rate × hours worked
At a $100 contractor rate for 2,080 hours (full time): $208,000/year
Equivalent employee at $120k salary, all-in: $156,000/year
In this case, the employee is clearly cheaper — but only if you need someone full time, year-round, with the same skill set.
When Contractors Are Cheaper
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Part-time need: < 20 hours/week (< 1,040 hours/year) — employee overhead is wasted on idle capacity.
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Short-term project: 3–6 months — you avoid recruiting costs, severance, and benefits setup for a limited engagement.
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Specialized skills: A $200/hr specialist for 40 hours ($8,000) is cheaper than hiring a specialist employee at $150k/year for one-time work.
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Speed: Contractors can start in days; employees take 30–90 days to source and onboard.
Hidden Costs of Employees vs Contractors
| Factor | Employee | Contractor |
|---|---|---|
| Recruiting cost | $5k–$30k | Minimal |
| Onboarding time | 2–6 months | Days |
| Severance risk | Yes | No |
| Benefits overhead | $15k–$25k/year | None |
| Management overhead | Higher | Lower |
| IP assignment | Clear | Requires contract |
| Compliance risk | Lower (W-2) | Misclassification risk |
The Breakeven Formula
At what rate does a contractor break even with an employee?
Breakeven contractor rate = (salary × 1.30) ÷ hours needed
For a $100k employee needed 1,040 hours/year: ($130k ÷ 1,040) = $125/hr
If the contractor charges more than $125/hr for 1,040 hours, the employee is cheaper at the margin. If they charge less, the contractor is cheaper.
Calculate your numbers at the Employee Cost Calculator.