Salary vs contractor: break-even rate

The mistake most first-time contractors make

A worker earning $100,000 on salary does the maths quickly: 52 weeks × 40 hours is 2,080 hours, so $100,000 / 2,080 ≈ $48 per hour. They quote $50 per hour as a contractor and feel they’ve negotiated a raise. Twelve months later they notice their take-home has fallen — often substantially. The arithmetic was right; the model was wrong. A salaried hourly rate and a contracting hourly rate are not the same unit. The contractor’s rate must absorb costs and risks the employer was quietly carrying.

What the salary was really paying for

Before tax or any other deduction, a salary silently funds several things a contractor will now pay for directly:

Paid time off. Annual leave, sick leave, and public holidays mean a salaried worker bills closer to 46 weeks of effective work per year, not 52. A contractor who bills only the weeks they show up loses that buffer entirely.

Overhead. Equipment, software licences, professional insurance, accounting, training, and a home office all come out of contracting revenue. A 10–20% overhead figure is common; complex disciplines run higher.

Retirement contributions. Employers typically contribute a percentage of salary toward retirement savings on top of stated pay. Contractors must fund their own equivalent from gross revenue if they want to keep pace.

Non-billable time. Business development, invoicing, chasing late payment, upskilling, and admin are all hours worked that no client is paying for. A realistic utilisation rate of 70–85% is typical — higher than that tends to indicate undercharging.

Building the break-even rate

Start with annual salary and work forward, layering in each replacement cost:

1. Subtract paid leave and public holidays from the calendar year to find billable weeks.
2. Within each billable week, apply a utilisation rate to distinguish billable from non-billable hours.
3. Multiply the annual salary by one plus the overhead percentage to account for equipment and running costs.
4. Add the retirement contribution percentage the employer was paying on your behalf.
5. Divide by the resulting billable-hour denominator.

The output is almost always sobering. A $100,000 salary with standard leave, modest overhead, and conservative utilisation typically requires a contracting rate between $75 and $95 per hour just to break even — not to come out ahead.

When contracting actually pays

The break-even rate is the floor, not the goal. Contracting becomes financially worthwhile when clients pay a meaningful premium above it — the contracting premium. That premium compensates for income volatility, the absence of employer benefits, and the administrative load. A useful heuristic is targeting 15–30% above break-even for stable, long-term contracts, and more for short-term or specialist work.

If the best available rate sits at or below your break-even figure, a salaried role with equivalent responsibilities is almost certainly the better financial outcome — regardless of how appealing the hourly rate looks at first glance.

Run your own numbers

Use the salary vs contractor calculator to enter your current salary, realistic leave and overhead assumptions, and target utilisation. The tool returns both the break-even rate and the rate that actually replaces your full compensation package. If you’re also weighing the pay-frequency conversion, the income breakdown calculator converts any stated rate into every other frequency.