Do Contractors Make More Than Employees? (2026)
Contractors charge 25–100% more per hour — but after self-employment tax, health insurance, and overhead, the net pay gap is often much smaller than it looks. Enter your numbers below to see exactly where you stand.
Educational only: This calculator provides estimates for planning purposes. It is not tax or legal advice.
How much more do contractors actually earn?
Enter a salary and contractor rate to see the real net income gap — after all overhead costs.
Where your contractor overhead goes
| Cost you cover as contractor | Annual | Per hour |
|---|---|---|
| Gross contract revenue | — | — |
| SE tax extra (7.65% of gross) | — | — |
| Health insurance | — | — |
| Unpaid time off cost | — | — |
| Business overhead | — | — |
| Total overhead | — | — |
| Contractor net income | — | — |
Rate sensitivity — what if you charged more or less?
| Hourly rate | Contractor net | vs Salary | Gap % |
|---|---|---|---|
| — | — | — | — |
| — | — | — | — |
| — your rate | — | — | — |
| — | — | — | — |
| — | — | — | — |
How to read this table: Each row shows contractor net income at a different hourly rate, holding all other inputs constant. The highlighted row is your current rate. Use this to find the rate where contracting starts to clearly outpay the equivalent salary.
Get the free Employee vs Contractor Risk Report →
Calculate your minimum contractor rate →
Comparing a specific contract offer vs a salary offer? Use the Contract Rate vs Salary Calculator for a full side-by-side comparison.
Why the contractor pay gap is smaller than the hourly rate suggests
A contractor charging $76/hour against a $75,000 salary looks like a huge premium — until you work out the net income. At 1,750 billable hours, gross revenue is $133,000. But before spending a dollar of that:
The five costs that close the gap
1. Self-employment tax (7.65% extra)
Employees pay 7.65% FICA. Their employer pays a matching 7.65%. As a contractor, you pay both sides — 15.3% total. That extra 7.65% on $133,000 gross is $10,175 per year that disappears before income tax. An equivalent employee never sees this cost because their employer absorbs it silently. See Independent Contractor Taxes for the full breakdown, including quarterly payments and deductions.
2. Health insurance ($4,000–$18,000/year)
This is the single largest gap-closer for most contractors. Employers typically cover 70–80% of health insurance premiums. A solo plan on the marketplace runs $4,000–$8,000/year; a family plan runs $14,000–$24,000/year. The $9,000 default in the calculator reflects a mid-range individual plan. If your health insurance costs are low (spouse's plan, low-cost plan), the contractor pay advantage is significantly larger than the default calculation shows.
3. Unpaid time off
Every day you don't bill is a day you don't earn. At $133,000 in annual billings, the calculator above values 20 unpaid days at roughly $10,230 (your daily share of annual revenue × 20 days) — Employees receive this as part of their compensation package — contractors must price it into their rate or accept the income reduction.
4. Business overhead
Equipment, software, accounting, professional liability insurance, and the time spent finding the next client all have real costs. A minimal freelance setup runs $3,000–$5,000/year; a professional independent practice can run $8,000–$15,000/year. The $5,000 default covers a basic setup.
5. Income gaps between projects
This cost isn't in the calculator because it varies too much to model reliably — but it's real. Even established contractors typically experience 2–4 weeks of unbilled time per year between engagements. New contractors often face 6–10 weeks. This is why the Contractor Rate Calculator includes a gap buffer in its recommended rate — the calculator on this page uses actual billable hours as the input, so you're accounting for gaps implicitly by entering realistic hours rather than 2,080.
When contracting clearly pays more
The contractor pay advantage is real and significant when the right conditions are in place:
Conditions that widen the gap in your favour
- Health insurance covered by a spouse's plan: removes $9,000–$18,000 in overhead, making almost any reasonable rate more profitable than the equivalent salary
- Rate significantly above 1.75× employee equivalent: at 2× or higher, net income advantage becomes substantial regardless of overhead
- High billable hours (1,900+): each additional hour billed at your rate with fixed overhead drops almost entirely to net income
- Business expense deductibility: overhead costs reduce your taxable income, meaning the after-tax advantage is larger than the pre-tax figures suggest
- Low-benefits salary comparison: if the employment offer has minimal benefits (no health insurance, no 401k match), the salary's true value is just the base — making the contractor advantage larger
When employment is the better financial choice
- Rate below 1.5× employee equivalent: below this threshold, overhead typically consumes the entire rate premium and contracting nets less than the equivalent salary
- High health insurance costs: family coverage at $20,000+/year dramatically narrows the gap — a $76/hour rate nets roughly the same as a $75,000 salary with family coverage
- Rich benefits package: a salary with $20,000+ in employer-funded benefits (health, 401k match, generous PTO) has a true value well above the base salary number
- Low billable hours: if market demand means you bill fewer than 1,400 hours/year, the math typically favours employment regardless of rate
Use the calculator above to test your specific scenario — the sensitivity table shows exactly where the crossover point is for your numbers.
The contractor rate multiplier: what 1.5×, 1.75×, and 2× actually mean in net income
The commonly cited rule of thumb is that contractors should charge 1.5–2× the equivalent employee hourly rate. Here's what each multiplier actually delivers in net income terms, using a $75,000 salary ($36.06/hour base) as the example:
| Multiplier | Hourly rate | Gross (1,750 hrs) | Net after overhead | vs $75k salary |
|---|---|---|---|---|
| 1.25× | $45/hr | $78,750 | ~$52,700 | −$22,300 (pays less) |
| 1.5× | $54/hr | $94,500 | ~$66,000 | −$9,000 (pays less) |
| Break-even | ~$60/hr | ~$105,100 | ~$75,000 | $0 (same) |
| 1.75× | $63/hr | $110,250 | ~$79,300 | +$4,300 (pays more) |
| 2× | $72/hr | $126,000 | ~$92,700 | +$17,700 (pays more) |
| 2.5× | $90/hr | $157,500 | ~$119,300 | +$44,300 (pays more) |
The key takeaway: The break-even for a $75,000 salary is around $60/hour (1.67×) — not 1.5×. At 1.5×, contracting actually pays less than the equivalent salary after overhead. The 1.5× rule is a minimum rate floor, not a rate that beats employment.
Related tools and guides
- Contractor Rate Calculator Calculate your minimum hourly rate from a target income
- Independent Contractor Taxes Estimate your quarterly self-employment tax and see what deductions you can claim
- Contract Rate vs Salary Calculator Compare a specific contract offer against a salary offer side by side
- Contractor vs Employee Cost Calculator Employer perspective: compare total hiring cost of each option
- Employee vs Contractor Cost Guide Full cost breakdown at every salary level — employer and worker perspectives
- How to Classify Workers IRS and ABC test classification criteria explained
Frequently Asked Questions
Do contractors make more money than employees?
On a gross hourly basis, yes — contractors typically charge 25–100% more per hour than equivalent employees. But after paying self-employment tax (15.3%), self-funded health insurance ($4,000–$18,000/year), unpaid time off, and business overhead, net income is often only 10–30% higher than an equivalent salary. Whether contracting pays more depends heavily on your hourly rate, billable hours, and overhead costs — especially health insurance.
How much more should a contractor charge than an employee earns?
A contractor needs to charge at least 55–80% more per hour than the equivalent employee hourly rate just to break even on net income — covering extra self-employment tax (7.65%), self-funded health insurance, unpaid time off, and business overhead. Lower salaries need the larger premium, since fixed overhead costs eat up a bigger share of a smaller paycheck. To meaningfully exceed an equivalent employee's net income, contractors typically need to charge 80–100% more per hour. Use the calculator above for your specific numbers.
What is the contractor pay gap vs employee pay?
The contractor pay gap is the difference in net income between a contractor and an equivalent salaried employee. At a 1.5× rate multiplier (e.g., $54/hr vs $36/hr employee equivalent), contractors typically net less than the equivalent employee after overhead — the 1.5× rule is a cost parity floor, not an advantage. The crossover into positive territory typically happens between 1.5× and 1.75×, though lower salaries need a higher multiplier to get there. At 2×, contractors typically net 15–30% more, with the larger gains at higher salary levels. Use the calculator to see the gap for your specific rate and salary.
At what contractor rate do you break even with a salary?
The break-even contractor rate depends on the equivalent salary and your overhead costs. Using typical default overhead ($9,000 health insurance, $5,000 business expenses, 20 unpaid days) at 1,750 billable hours: a $60,000 salary breaks even around $50/hour, a $75,000 salary breaks even around $60/hour, and a $100,000 salary breaks even around $77/hour. Lower health insurance costs or fewer unpaid days will lower your break-even rate further. The calculator above shows your specific break-even rate as you adjust inputs.
Why do contractors charge more per hour than employees earn?
Contractors charge more because they pay costs that employers normally cover for employees: the employer's share of FICA tax (7.65%), health insurance ($500–$1,500/month), paid time off, equipment, and business overhead. The higher hourly rate is not profit — it's cost parity, and often falls short of it. A contractor charging 50% more than the equivalent employee hourly rate is often still netting 5–20% LESS after overhead, not more.
Is it better to be a contractor or employee financially?
Contracting is financially better when your hourly rate is at least 1.75× the equivalent employee rate (and higher than that for salaries below $75,000), you bill 1,700+ hours per year, and your health insurance costs are manageable (especially if covered by a spouse's plan). Employment is financially better when the salary comes with a rich benefits package (health insurance worth $15,000+, strong 401k match), or when your contract rate is below 1.5× the equivalent employee rate. Use the calculator above to find your specific crossover point.
Is a $100,000 salary better than a $159,000/year contractor role?
No — at this site's default overhead assumptions ($9,000 health insurance, 20 unpaid days, $5,000 business expenses), a $159,000/year contract role nets approximately $120,600 after self-employment tax, health insurance, and unpaid time off — about $20,600/year (21%) more than a $100,000 salary. This checks out against the break-even figures above: $100,000 breaks even around $77/hour at 1,750 billable hours (~$134,750/year), and $159,000 clears that comfortably. The contractor side wins here mainly because the implied multiplier (1.59×) clears the typical 1.5×–1.75× crossover zone for this salary level. Lower health insurance costs or fewer unpaid days would widen the gap further in the contractor's favor; higher health costs or more unpaid time would narrow it.