Worked example: $90K salary vs $75/hr contractor
Loaded W-2 cost is $115,200. The contractor at 1,800 hours costs $135,000 — $19,800 more, but with zero benefits admin, instant exit, and no idle-time cost. Drop the need to 1,200 hours and the contractor is $90,000 — $25,200 cheaper. The break-even sits at 1,536 hours: above that, hire; below it, contract.
- • Contractors set their own hours and use their own tools — that is the legal test, not the invoice.
- • A W-2 hire's first-year cost includes recruiting and ramp, not in this comparison.
- • Many teams blend: W-2 core, contractor surge capacity.
FAQ
Is it cheaper to hire a contractor or an employee?
Below roughly 1,200–1,500 hours a year, contractors usually cost less because you pay only for output. At full-time hours, a W-2 employee at market salary typically costs 15–30% less than the equivalent contractor.
Why do contractors charge so much more per hour?
They pay both sides of FICA (15.3%), their own benefits, unpaid bench time, and business overhead. A $75/hr contractor nets roughly what a $55–60/hr W-2 equivalent costs.
What is worker misclassification?
Treating an employee as a 1099 contractor. If the IRS or state finds behavioral control (set hours, supervision) and financial dependence, you owe back employer taxes, interest, and penalties — and possibly benefits.
When should I convert a contractor to an employee?
When the hours approach full-time, you need schedule control, the work is core to the business, or the relationship has run long enough to look permanent. Conversion also locks in loyalty the open market can't.
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