Contractor vs. W-2 Employee Cost Calculator

About this calculator

The sticker price of a $85,000 salary is not what a W-2 employee actually costs — the true figure is typically 1.25× to 1.45× the base salary once you add employer payroll taxes, benefits, equipment, and onboarding. This calculator builds up that fully-loaded cost line by line and puts it next to the total annual cost of an independent contractor engagement so you can see, dollar for dollar, which hiring model costs less for your specific situation. Contractors can appear more expensive on paper but are often cheaper when you factor in benefits and payroll overhead — or vice versa depending on your state unemployment rate and benefit offerings.

Field explanations

Hours worked per week

Used to calculate the cost-per-hour metric for each option. Standard full-time is 40 hrs/week (2,080 hrs/year). Part-time or reduced schedules will increase the effective hourly cost for the W-2 employee since fixed costs like FUTA and benefits are spread over fewer hours.

Annual base salary

The W-2 employee's gross annual compensation before any taxes or deductions. This is the figure shown on the offer letter — the "floor" of what the employee actually costs.

Health insurance (employer/mo)

The employer's monthly premium contribution for medical, dental, and vision coverage. The national average employer contribution for single coverage is roughly $600–$700/month; family coverage averages $1,500–$1,800/month (KFF 2023).

401(k) employer match

The employer's matching contribution as a percentage of the employee's base salary. Common structures are 3–4% match (e.g., dollar-for-dollar up to 4%). Enter the effective match percentage — e.g., "4" if you match 100% of the first 4% the employee contributes.

SUTA rate

State Unemployment Tax Act rate, set by each state and varying by employer experience rating. New employer rates typically range from 1%–4%. The default of 2.7% is a common new-employer rate in many states. Look up your state's current new-employer rate or your assigned experience rate.

SUTA wage base

The maximum wages per employee on which SUTA is owed. This varies widely by state — from $7,000 (California, Florida) to over $60,000 (Washington state). The default $7,000 matches the federal FUTA wage base and is on the low end.

One-time onboarding cost

The total one-time cost to recruit, interview, hire, and ramp up the new employee. Includes job posting fees, recruiter time, background checks, hardware, software licenses, and dedicated training time. SHRM estimates average replacement costs at $4,000–$7,000 for most roles.

Expected employee tenure

How many years you expect this employee to stay. The one-time onboarding cost is divided by this figure to produce an annual amortized cost. A shorter tenure makes the W-2 option more expensive on a per-year basis; a long tenure spreads it thin.

Annual overhead

Recurring annual costs specific to this headcount: laptop and equipment depreciation, software seat licenses, office space allocation, and HR/payroll processing costs. A typical allocation is $2,000–$5,000/year for a knowledge-worker role with standard tooling.

Total annual contract cost

The total fees your company pays for the contractor engagement — whether billed as an hourly rate × estimated hours or a fixed project/annual fee. If you go through a staffing agency, this includes their markup; if direct-hire, this is what the contractor invoices. Note: contractors pay their own SE taxes and benefits, so this is a fully-loaded cost from the company's perspective.

Agency markup %

If you're engaging a contractor through a staffing or vendor management firm, enter their markup percentage (typically 15–30%). This is informational — it shows how much of your contract spend goes to the agency vs. the contractor. Enter 0 if you're engaging the contractor directly (corp-to-corp or 1099).