How much more should a contractor make?

Q: How do I calculate an hourly rate from a salary?

Divide annual salary by 2,080 (52 weeks × 40 hours). $80,000 becomes $38.46 an hour. That figure includes paid holidays, which is why it is too low to use directly as a contract rate.

Q: How do I turn a freelance day rate into an annual salary?

Multiply the day rate by the days you will actually bill, not every weekday, then subtract business costs and the benefits you now fund yourself. The result is the comparable pre-tax salary.

Q: Is the answer different in the UK or Canada?

The arithmetic is identical in any currency, but inputs such as statutory holiday, health cover and pension rules differ, so the percentage differs. Tax differs most and is not modelled here.

Q: Is contracting worth it?

This site does not make that decision. It shows the rate at which the money comes out level for your inputs; security, the work itself and running a business usually decide the rest.

Q: What share of the year will I actually bill?

It cannot be known in advance, so the calculator shows three levels. Build it from your own holiday, illness and admin time, and plan against the cautious figure.

There is no single percentage. There is a sum, and the biggest part of it is days you cannot bill.

6 minute read

How much more should a contractor make than an employee? The usual answer is a single flat percentage, offered as if it applied to everyone. It cannot, because the gap is built from three things that differ from person to person — and one of them is far bigger than the others. Put your own figures into the employee vs freelance calculator and it builds your percentage from scratch. This page shows what goes into it.

The three things the premium has to pay for

When you leave a job, you lose more than the salary. The rate you charge as a contractor has to replace three separate things, and each one multiplies the last.

1. The part of the package that was never on the payslip. Employer retirement contributions, health cover, and anything else with a cash value. These were paid on top of salary, and now you fund them yourself.

2. The cost of being in business. Insurance, an accountant, software, equipment. Nobody reimburses these any more; they come out of revenue before anything reaches you.

3. The days you cannot bill. Holiday, illness, invoicing, chasing payment, pitching for work you do not win. An employee is paid for all of those days. A contractor is paid for none of them.

A worked example

Take an $80,000 salary with a 5% employer retirement contribution, $3,000 of health cover and $1,000 of other benefits. Assume $6,000 a year of business costs, and a year of 260 weekdays with 25 days off, 5 days ill and 40 days of unbilled admin and sales. Those are inputs to change, not typical values — yours will differ.

The whole package is worth $88,000 — 10% more than the salary.
Add the business costs and the revenue needed is $94,000.
That leaves 190 billable days out of 260, or 73% of the year.
$94,000 over 190 days is a day rate of $494.74, or $61.84 an hour at eight hours a day.

The employee's hourly figure is $80,000 ÷ 2,080 hours (52 weeks of 40 hours) = $38.46. So in this example the contractor needs to charge about 61% more per hour just to end up where the employee started — before tax on either side.

Where the 61% actually comes from

The premium is three ratios multiplied together, and splitting it up shows which one matters:

Benefits: package ÷ salary = 1.10
Business costs: revenue ÷ package = 1.07
Unbillable days: 260 ÷ 190 = 1.37

1.10 × 1.07 × 1.37 ≈ 1.61. The benefits and the costs are real, but the unbillable days are the biggest single factor. That is why a flat percentage fails: it quietly assumes a particular number of billable days, and that is the one thing that varies most between people.

Change one input, and the answer moves a lot

Same $80,000 salary, same method, different circumstances:

No benefits at all, same costs and days: about 47% more per hour.
Generous benefits ($8,000 health cover, an 8% employer contribution, $2,000 other): about 75% more.
The worked example, but only 60% of the year billed: about 96% more.
The worked example, but 80% of the year billed: about 47% more.
No benefits, no business costs and only 10 days of admin: about 18% more.

From 18% to nearly double, for the same salary. Any single number quoted as the answer is one row of this list presented as if the others did not exist.

What this leaves out: self-employment tax

Everything above is pre-tax on both sides, on purpose. Self-employed people are taxed differently from employees — in the US and the UK, for a start — and differently again depending on whether they trade as a sole proprietor, a limited company or another structure. This site has sourced tax data for employees only, so it does not model self-employment tax and does not quote a rate for it. Depending on the country and the structure, the difference can move the answer either way, so treat the percentages above as the pre-tax part of the sum. An accountant in your own country can put a number on the rest.

If you already know what you want to take home and want to work backwards to a day rate, the freelance rate calculator does that, and lets you enter your own tax set-aside rather than assuming one.

Common questions

How do I calculate an hourly rate from a salary?

Divide the annual salary by 2,080 — 52 weeks of 40 hours. $80,000 ÷ 2,080 = $38.46. That figure already includes paid holidays, because the salary covers them, which is exactly why it is too low to use as a contract rate.

How do I turn a freelance day rate into an annual salary?

Multiply the day rate by the days you will actually bill — not by 260 — then subtract your business costs and the value of the benefits you now pay for yourself. What remains is the salary it is comparable to, before tax. Multiplying by every weekday is the most common way to overstate it.

Is the answer different in the UK or Canada?

The arithmetic is the same in any currency: benefits, business costs and unbillable days. The inputs differ — statutory holiday, public health cover, pension rules — so the percentage will too. Tax differs most of all, and this page does not model it anywhere.

Is contracting worth it?

That is a decision, and this site does not make decisions for anyone. What it can tell you is the rate at which the money comes out level, for your own inputs. Security, the kind of work, and how much you want to run a business are the things that usually decide it, and none of them is arithmetic.

What share of the year will I actually bill?

Nobody can tell you in advance, which is why the calculator shows it at three levels. Build it from your own year: the holiday you want, a realistic allowance for illness, and an honest estimate of admin and sales time. Then look at the cautious row, because a rate that only works in a good year is the one that goes wrong.

Not tax or financial advice. All figures compare two packages before tax, using example inputs you should replace with your own. Self-employment tax is not modelled on this site.