How to calculate real cost of employee

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Employees vs. Independent contractors: do you know the real price of hiring?

Have you ever thought about the real hourly cost of employees in contrast to independent contractors? Global experience has shown that it’s hard enough to calculate your expenses exactly. To make the right call you should know about possible hidden costs.

Let’s base on $20 per hour as your employee’s rate. If we take average 2,080 hours a year his annual salary will be $41.600. The employee can absent from work for at least 15 days (paid time off) that reduces his working hours to 1960 and automatically increases the hourly rate to $21.2. Besides basic pay, you should take into account the amount of annual overhead costs you pay in addition to your employee’s hourly wage.

On the other hand, when you hire an independent contractor you also pay more than just his hourly rate. To be more concrete we’ll base on $30 as consultant’s wage per hour.

Let’s compare:

 

Employee Independent contractor
  • FICA Taxes (Social Security and Medicare taxes) (7.65%)
  • FUTA (6%)
  • 401K Contribution (3%)
 These taxes don’t apply for independent contractors.
Insurance (16%):

  •  life
  •  accident
  •  dental
  •  medical
  •  vision
  •  long-term care insurance
  •  disability insurance ($2000 per month)
 In general, IT contractors cover insurance expenses themselves.
Retirement benefits (4%) Pension contributions are paid by consultants.
  • Sick Leave (0.5%)
  • Annual leave (4.5%)
 Annual and sick leaves are usually unpaid.
 

Fringe Benefits: (25%)

 

  • achievement awards
  • educational assistance
  • employee discounts
  • employer-provided cell phones
  • meals
  • training
  • company cars
  • entertainments
  • travel expenses
  • bonuses
  • childcare assistance
  • Employee Assistance Programs
  • other working condition benefits

 

 

 

  

Fringe benefits are rarely offered to contractors. Even if they are, it’ll be your own choice and you can easily control all expenses. Statistically, consultants’ perks amount to 5-8% of their salary.
 

Overhead: (15%)

 

  • office equipment and supplies
  • external legal and audit fees
  • ads
  • computer hardware and software
  • conferences
  • delivery and postage
  • furniture
  • repairs

 

 

 

 

  

It’s more common for consultants to work at home/in their own office, so most overheads are usually avoided.
 

General & Administrative: (18%)

 

  • salaries and benefits for “back office” workers and senior executives
  • marketing costs
  • government fees and legal expenses
  • bank service charges and fees
  • corporate taxes
  • executive staff
  • other managerial salaries
  • hosting services

 

 

  

G&A expenses are the same as for employee – 18%.
 

Recruiting (5%)

  • interview expenses
  • ads
  • HR’s salary
  • meeting expenses
  

The expenditure is often less – about 2%.

Adding up, the real hourly cost of an employee is $55/hour instead of $2o per hour in the beginning. Contractor’s cost is $39/hour despite the fact that his starting salary was higher than employee’s. As you can see independent contractor will cost you less. The numbers mentioned in this article are not accurate but they can help you to get closer to your future expenses.