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 |
|
These taxes don’t apply for independent contractors. |
Insurance (16%):
|
In general, IT contractors cover insurance expenses themselves. |
| Retirement benefits (4%) | Pension contributions are paid by consultants. |
|
Annual and sick leaves are usually unpaid. |
|
Fringe Benefits: (25%)
|
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%)
|
It’s more common for consultants to work at home/in their own office, so most overheads are usually avoided. |
|
General & Administrative: (18%)
|
G&A expenses are the same as for employee – 18%. |
|
Recruiting (5%)
|
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.
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