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Salary vs Contractor calculator

Compare a salary package against a contractor rate — factoring in paid leave, retirement, and overhead.

Logic updated April 2026

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This calculator compares a salaried employment package against a contractor hourly arrangement on a like-for-like basis. It computes the salary's effective hourly rate (per actually-worked hour, including paid leave), the salary's total package value (including employer retirement contributions), and the break-even contractor hourly rate that would match the salary's total package after the contractor's overhead.

How this is calculated

Formula

billableWeeks = 52 − leaveWeeks − sickWeeks − publicHolidays/5 ; salaryEffectiveHourly = annualSalary / (hoursPerWeek × billableWeeks) ; salaryTotalPackage = annualSalary × (1 + retirement%/100) ; breakEvenContractorHourly = salaryTotalPackage / (hoursPerWeek × billableWeeks × (1 − overhead%/100))

Step-by-step

Calculate billable weeks per year: 52 minus paid leave, sick leave, and public holidays converted from days
Compute salary effective hourly rate: annual salary ÷ (hours per week × billable weeks)
Compute salary total package: annual salary plus employer retirement contribution
Compute break-even contractor rate: total package ÷ (billable hours × (1 − overhead %)) — this is the rate at which the contractor matches the salary's total value
Compute contractor net annual income at the user's actual hourly rate: rate × billable hours × (1 − overhead %)
Flag whether the contractor rate beats, matches, or falls short of break-even (within $100/year tolerance)

Rounding mode: ROUND_HALF_UP
Precision: 20-digit internal precision (Decimal.js), rounded to 2 decimal places for display
Logic last reviewed: 2026-04-30

Assumptions & limitations

What this calculator assumes

Standard 52-week year
Standard 5-day work week for converting public holiday days into weeks
Employer retirement contribution and contractor overhead are user-supplied percentages
The break-even contractor rate equates contractor net income with the salary total package
Comparison tolerance is $100 of annual net income

What this calculator doesn’t account for

Doesn't model jurisdiction-specific tax differences between salary and contracting
Doesn't include the value of paid sick leave, parental leave, or other benefits beyond the explicit retirement contribution
Doesn't account for income smoothing — contractors face variable monthly income
Doesn't include unpaid time spent on contractor admin (invoicing, business development)
Doesn't factor in different insurance products (workers' comp, professional indemnity)

Worked example

A worker compares a $100,000 salary with 11% employer retirement contribution, 4 weeks paid leave, 2 weeks sick leave, 10 public holiday days, working 38 hours/week — vs a $90/hour contractor offer with 25% overhead.

Input	Value
Salary / retirement	$100,000 / 11%
Leave / sick / public holidays	4 weeks / 2 weeks / 10 days
Hours per week	38
Contractor rate / overhead	$90/hour / 25%

Billable weeks: 44 — Salary effective hourly: $59.81 — Salary total package: $111,000 — Break-even contractor: $79.78 — Contractor net at $90: $111,720 — Contractor wins narrowly

Billable weeks: 52 − 4 − 2 − (10/5) = 44 weeks. Salary hourly: $100,000 ÷ (38 × 44) = $59.81. Total package with retirement: $111,000. Break-even contractor rate: $111,000 ÷ (38 × 44 × 0.75) = $88.55... but with the $100 tolerance the calculator flags $90 as 'matches' rather than 'beats'. Contractor net at $90: $90 × 38 × 44 × 0.75 = $112,860 — slightly above the salary total package, but the gap is narrow. Job security and benefits would likely tip the scales toward salary in this scenario.

Frequently asked questions

Is contracting really more profitable?

Often by 20–40% on headline hourly rates, but the gap shrinks dramatically once you include unpaid leave, employer retirement contributions, sick leave, and contractor overhead (insurance, admin time, equipment, accounting fees). Real comparisons typically show contracting wins by 5–15% on take-home for the same role — sometimes the salary actually wins once everything is properly counted.

What costs do contractors bear that employees don't?

Insurance (professional indemnity, public liability, income protection), accounting and tax compliance, equipment and software, training and conferences, business development time (proposals, networking), gaps between contracts, and the operational overhead of running a small business. Total overhead is typically 15–35% of gross revenue. The 'overhead percent' input in this calculator captures this in a single number.

How do I compare equivalent rates?

Use this calculator's break-even output as the benchmark. The break-even contractor rate is what your hourly rate must be to match the salary's total package after overhead. If you're being offered above break-even, contracting is financially better; below break-even, salary is. The calculator does the messy maths of converting between hourly and annual, factoring in leave time, retirement, and overhead.

What about job security and benefits?

These are real but unpriced in the calculator. Salaried positions typically include paid sick leave, paid parental leave, redundancy entitlements, professional development funding, and steadier income — all valuable but hard to quantify. A 10–15% premium for contracting is roughly the threshold where most workers see the financial gain as worth giving these up. Below that, salary is usually the better deal even with a lower headline rate.

Should I include taxes in the comparison?

If your jurisdiction taxes salary and contractor income differently, yes — but this calculator doesn't model tax. Add a separate adjustment: compute the after-tax figures for both paths under your jurisdiction's rules (some jurisdictions favour contractor structures via deductions; others favour employees via pre-tax benefits), then compare those. Specific tax treatment varies; consult a qualified tax adviser for your jurisdiction.

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