Contractor vs. FTE Cost Calculator

What does it actually cost to employ someone beyond their salary?

An $85,000 salary doesn't cost $85,000 to employ — it costs employer FICA (Social Security + Medicare), FUTA and SUTA unemployment taxes, workers' comp insurance, benefits, paid time off, and equipment on top of it. Using the calculator's defaults, that adds up to $23,576 on top of the $85,000 salary — a true annual cost of $108,576, or about 27.7% above salary.

That 27.7% lines up with the commonly cited 25-40% "fully loaded" range for W-2 employees, but the calculator gets there by actually computing each component rather than assuming a blended percentage. That distinction matters because the components don't scale the same way: FICA, FUTA, and SUTA all cap out at specific wage bases, so a $250,000 salary has a much lower percentage loading than an $85,000 one — a flat 30% rule overstates the true cost of your higher earners and understates it for your lower earners.

How do I calculate employer payroll taxes correctly — FICA, FUTA, and SUTA?

Each tax applies to a different slice of wages, and mixing them up is the single most common employer costing mistake:

• FICA (employer share): 6.2% Social Security on wages up to the Social Security wage base ($176,100 in the calculator's 2026 estimate), plus 1.45% Medicare on all wages with no cap.
• FUTA: 0.6% (standard post-credit rate) on just the first $7,000 of wages — a fixed federal cap that doesn't change by state or salary.
• SUTA: varies by state, applied to a state-specific wage base (often $7,000-$50,000 depending on the state) at a rate tied to your unemployment claims history.

Because FUTA and SUTA both cap out early in the year, they contribute far less to total cost than most people assume — in the calculator's defaults, FUTA and SUTA together add just $298.50 to an $85,000 salary, while FICA alone adds $6,502.50. Workers' comp, by contrast, applies to full wages and varies enormously by industry (0.5% for low-risk office work up to 5%+ for physically hazardous jobs), so it's often the tax line item worth double-checking against your actual policy.

When is a contractor cheaper than a full-time employee?

Almost always cheaper below roughly 1,000-1,200 annual hours, and typically more expensive above 1,500-1,800 hours — but the exact crossover point depends on your specific numbers, which is what the break-even calculation gives you.

Using the calculator's defaults: an $85,000 employee has a true annual cost of $108,576. A $75/hour contractor breaks even with that cost at 1,441 hours per year. Below that, the contractor is cheaper; above it, the employee is. At the calculator's default planned engagement of 1,200 hours (25 hours/week for 48 weeks), the contractor saves $18,076 a year — but push that same contractor to full-time hours and the math flips, because you're now paying their premium rate on every hour instead of only the hours you actually need.

What's the difference between a contractor's hourly rate and an employee's effective hourly cost?

An employee's effective hourly cost is their true annual cost (salary + taxes + benefits + PTO + equipment) divided by their actual productive hours — not the nominal 2,080-hour work year, since vacation, sick time, and holidays reduce real output. In the calculator's defaults, that's $108,576 ÷ 1,880 hours = $57.75/hour.

A contractor's hourly rate already includes everything — there's no separate tax or benefits layer to add, since the contractor absorbs those costs themselves in the rate they quote. That's why a $75/hour contractor rate looks more expensive than a $57.75/hour employee cost at first glance, even though the contractor might still be the cheaper overall choice — the comparison that actually matters is total annual cost at the hours you need, not the hourly rates side by side.

Does hiring a contractor instead of an employee create legal risk?

Yes, and cost isn't the only factor in the decision. The IRS and state agencies (notably California's ABC test under AB5) evaluate worker classification based on behavioral control, financial control, and the nature of the relationship — factors like setting the worker's schedule, providing their equipment, requiring exclusivity, or engaging them indefinitely all push toward "this is actually an employee," regardless of what the contract says.

Misclassification penalties can run several times the tax savings you thought you were getting, so this calculator answers the cost question, not the classification question — if the working relationship looks like employment in practice (set hours, company equipment, ongoing indefinite work, no other clients), a lower calculated cost doesn't protect you from a reclassification finding. Use the cost comparison to inform the decision, and confirm the working arrangement itself is genuinely independent before committing to it.