Freelance Figures

Small Business

Updated for 2026

True Cost of an Employee Calculator

Your inputs
$

The gross annual salary you offer, before any employer taxes or benefits

$

Annual employer cost of health insurance, retirement match, PTO accrual, and similar benefits

$

Annual cost of the laptop, software licenses, desk space, or other tools this role needs

$

Hiring cost (job ads, agency fees, interview time) spread across the employee's expected tenure

%

How much more a 1099 contractor typically bills above bare payroll-tax-and-benefits parity, to self-fund insurance at individual rates and cover unpaid time between contracts

Fully loaded annual cost
$75,590
Cost multiplier (× base salary)
1.26
Employer payroll tax (FICA)
$4,590
Monthly revenue needed to cover this role
$6,299.17
Contractor rate to match employee take-home
$88,237.50
Savings from contracting vs. hiring
-$12,647.50
Cheaper option for this work
Employee

A $60,000 salary offer never actually costs your business $60,000 a year — and a contractor doing the same work isn't automatically cheaper either, once you price in what it takes for a 1099 to net what a W-2 employee nets. This calculator totals the fully loaded cost of a US employee — salary, payroll tax, benefits, overhead, recruiting — then prices the same work as a contractor engagement, so you see which one is genuinely cheaper instead of guessing from the headline rate.

How it works

Start with base salary, then add employer payroll tax — the employer's half of FICA, 6.2% Social Security capped at the annual wage base plus 1.45% uncapped Medicare, which is 7.65% of salary for most hires — plus benefits (health insurance, retirement match), overhead (equipment, software, workspace), and recruiting cost (hiring spend amortized across expected tenure, so a $6,000 search over three years is $2,000 a year). Add all five together for the fully loaded annual cost, divide by salary for the cost multiplier, or by 12 for the monthly revenue this role needs to cover.

The contractor side starts from that same base salary and asks what a 1099 contractor must invoice to net that much. A contractor pays both FICA halves themselves, so we add back the employer-equivalent half you'd otherwise have owed, plus your stated benefits figure again as their self-funded equivalent — since they buy insurance and retirement savings at individual rates, not your group rate. That sum is the bare parity rate. The contractor premium, a percentage you set (25% by default), layers on the realistic markup contractors bill above parity for that individual-market gap and unpaid time between contracts, producing the contractor rate to match. Subtract that from the fully loaded cost: positive means contracting saves you money, negative means hiring wins.

Worked example

Say you're budgeting a $60,000 base salary, with $6,000 in benefits, $3,000 in overhead, $2,000 in amortized recruiting cost, and the default 25% contractor premium.

  • Employer payroll tax: $60,000 × 7.65% = $4,590
  • Fully loaded cost: $60,000 + $4,590 + $6,000 + $3,000 + $2,000 = $75,590
  • Cost multiplier: $75,590 ÷ $60,000 = 1.26×
  • Monthly revenue needed: $75,590 ÷ 12 = $6,299.17
  • Contractor parity rate: $60,000 + $4,590 + $6,000 = $70,590
  • Contractor rate to match: $70,590 × 1.25 = $88,237.50
  • Savings from contracting: $75,590 − $88,237.50 = −$12,647.50 (hiring wins)

That $60,000 hire actually costs $75,590 a year — but a contractor doing the same work would need to bill $88,237.50 to net what the employee nets after covering their own FICA and benefits, which is $12,647.50 more than simply hiring the employee outright.

How to interpret your result

The fully loaded cost is the number to budget against, not the offer-letter salary. The cost multiplier shows how top-heavy the add-ons are: near 1.2–1.3 usually means lean benefits and modest overhead, past 1.4 means richer benefits, pricier equipment, or costly hiring — worth a look, since benefits and overhead are the levers you control; payroll tax is fixed by statute.

Whichever option comes out cheaper does so for a specific reason: overhead and recruiting cost exist only on the employee side, while the premium exists only on the contractor side. Small overhead and recruiting next to the premium favors hiring, as above; large overhead and recruiting next to the premium favors contracting, even after the contractor covers their own FICA and benefits. Neither number is the full answer — a contractor trades your overhead and hiring hassle for their premium, and what you're buying is flexibility, not just a headline rate, since you can end the relationship without a layoff.

None of this is tax or legal advice, and it's a US-only estimate that skips state unemployment insurance, workers' comp, and either side's income tax. It also doesn't weigh who controls how the work gets done, which decides whether a role can legally be a contractor engagement — see Methodology.

Methodology & sources

employerPayrollTax = round(min(baseSalary, $184,500) × 6.2% + baseSalary × 1.45%). fullyLoadedCost = round(baseSalary + employerPayrollTax + benefits + overhead + recruitingCost). costMultiplier = fullyLoadedCost ÷ baseSalary (0 if base salary is 0). monthlyRevenueNeeded = round(fullyLoadedCost ÷ 12). contractorRateToMatch = round((baseSalary + employerPayrollTax + benefits) × (1 + contractorPremiumPercent ÷ 100)). savingsVsEmployee = round(fullyLoadedCost − contractorRateToMatch).

Employer payroll tax is the employer's half of FICA — 6.2% Social Security plus 1.45% Medicare, per the IRS's Topic no. 751, Social Security and Medicare withholding rates — with the 6.2% piece capped at the annual Social Security wage base ($184,500 for 2026) and the 1.45% piece uncapped.

The contractor rate to match assumes a contractor needs the same salary, the same FICA half now self-paid, and the same benefits dollar amount, self-funded — plus a premium for the individual-insurance gap and unpaid bench time between contracts. That premium is an adjustable assumption, not a government figure. Whether a role can legally be a contractor at all, not just what it costs, turns on the IRS's control-based worker classification test, described in Independent contractor (self-employed) or employee? — the SBA's guide to hiring and managing employees covers the same decision from the small-business side. Misclassification carries real back-tax and penalty risk, separate from anything priced here.

The commonly cited rule that a fully loaded employee costs 1.25 to 1.4 times base salary is discussed in Vena Solutions' guide to how much an employee costs; your multiplier and contractor premium will both move with your actual numbers.

These results are estimates for planning purposes only — not tax, legal, or financial advice.

Questions

Frequently asked questions

Why does an employee cost more than their salary?

Salary is only the starting point. As a US employer you also owe payroll tax on top of it (7.65% for Social Security and Medicare combined), plus whatever you spend on benefits like health insurance and retirement matching, overhead like equipment and software, and the recruiting cost of finding the person in the first place. Add all of that to the salary and you get the fully loaded cost — what the hire actually costs your business each year.

What is a normal cost multiplier?

Most sources put the fully loaded cost of a US employee at roughly 1.25 to 1.4 times their base salary, though it varies with how rich your benefits are and how much you spend on overhead and hiring. A multiplier near 1.25 usually means lean benefits and low recruiting spend; a multiplier above 1.4 usually means generous benefits, expensive equipment, or a costly hiring process.

Why 7.65% for employer payroll tax, and does it cap out at high salaries?

That 7.65% is the employer half of FICA — 6.2% Social Security and 1.45% Medicare — the same combined rate that applies to every employer regardless of size. This calculator models both pieces correctly rather than as a flat rate: the 6.2% Social Security portion is capped at the annual Social Security wage base ($184,500 for 2026), while the 1.45% Medicare portion applies to all wages with no cap. For any salary at or below the wage base that adds up to the familiar 7.65%; above it, only the uncapped Medicare piece keeps accruing on the excess — see Methodology for the detail.

Does this include state unemployment tax, workers' comp, or other state-level costs?

No. This calculator covers federal employer payroll tax (FICA) plus whatever you enter for benefits, overhead, and recruiting — it does not add state unemployment insurance, workers' compensation premiums, or other state-specific employer costs, which vary too much by state and industry to estimate generically. Fold your actual figures for those into the benefits or overhead fields if you want them reflected in the total.

Why would a contractor need to charge more than the employee's salary?

Because a 1099 contractor is running their own business. They pay the full 15.3% self-employment tax themselves — both the half you'd cover as an employer and the half a W-2 employee has withheld — and they have to buy their own health insurance and retirement savings at individual-market rates instead of your group rate. This calculator's contractor rate to match starts from the same salary, adds back the employer-equivalent FICA half and your stated benefits cost, then layers on an adjustable premium for that individual-market gap and the unpaid time between contracts.

So is hiring an employee or using a contractor cheaper?

It depends on your numbers, which is the point of running both sides. Overhead and recruiting cost only exist on the employee side — a contractor supplies their own equipment and isn't sourced through a hiring process — so those two inputs are what a contractor's premium has to outrun for hiring to win on pure cost. Low overhead and a high contractor premium tend to favor hiring; high overhead, low recruiting cost, and a lean contractor premium tend to favor contracting. Either way this compares dollars only, not control, availability, or the flexibility to end the relationship without a layoff.

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