Break-even rate

The break-even rate is the hourly figure a contractor must charge to match the total economic value of a salaried position. It is always higher than the salary divided by 2,080 hours, because a salary silently funds several things a contractor must now pay for directly.

What the break-even rate absorbs

Four buckets of cost or lost time sit between a salary’s “hourly equivalent” and a contractor’s real break-even:

• Paid leave — annual leave, sick leave, and public holidays reduce a contractor’s billable weeks from 52 to roughly 46
• Non-billable time — business development, invoicing, training, and admin; a realistic utilisation rate is 70–85% of scheduled hours
• Overhead — equipment, software, insurance, accounting, training; typically 10–20% of revenue for knowledge-work contractors
• Retirement contributions — employer contributions on top of salary must be self-funded from contracting revenue

Example

A $100,000 salaried role naively divides to $48/hour across 2,080 calendar-year hours. The honest break-even calculation:

• 46 billable weeks × 40 hours × 75% utilisation = 1,380 billable hours
• $100,000 + 20% overhead + 10% retirement = $130,000 required revenue
• $130,000 ÷ 1,380 hours ≈ $94 per billable hour

The contractor must charge almost double the naive figure just to break even — not to come out ahead.

Why it matters

The effective hourly rate of the salaried worker and the break-even rate of the contractor are the two numbers that actually compare. Anything a contractor charges above break-even is the contracting premium — compensation for income volatility, administrative load, and the absence of employer-provided benefits. A contract at or below break-even is a pay cut dressed up as an hourly raise.