Contractor Day Rate vs Salary: How to Compare Them Properly

Start with realistic billable weeks

Suppose your day rate is $700 and you expect to work five billable days a week for 46 weeks.

Your annual contract revenue would be:

$700 × 5 × 46 = $161,000

That is already $21,000 lower than the simple 52-week calculation.

Contract revenue is not salary

The $161,000 is business revenue before accounting for costs and the things you may have previously received through employment.

Suppose you expect $5,000 in annual business expenses and estimate that your employee benefits would be worth $10,000 per year.

You may also want to allow for a contractor buffer.

If you use a 15% buffer, one way to estimate the underlying employment equivalent is to remove that buffer first:

$161,000 ÷ 1.15 = $140,000

Then deduct the expenses and benefits you are trying to account for:

$140,000 − $5,000 − $10,000 = $125,000

Under those assumptions, a $700 day rate is roughly comparable to a:

$125,000 employee salarybefore personal tax

That is a very different answer from $182,000.

Why benefits matter

A salaried employee may receive value that never appears in the headline salary figure.

This can include pension or retirement contributions, health cover, bonuses, paid holidays and other employer-funded benefits.

If you compare contract revenue directly with salary, you effectively value all of those benefits at zero.

That may make the contract look more attractive than it really is.

Why unpaid time matters

Employees are often paid during annual leave and certain other periods when they are not actively working.

Contractors generally earn revenue when they are billing.

If you take several weeks off, those weeks may generate no revenue at all.

That is why working weeks are one of the most important assumptions in a contractor comparison.

Why the contractor buffer matters

A buffer is not a tax.

It is simply a way of recognising that contracting can involve uncertainty.

You may experience gaps between projects, changes in scope, delayed starts, late payments or a client ending a contract sooner than expected.

If your contractor rate only just replaces your employment package under perfect conditions, you have very little room when those perfect conditions do not happen.

Compare both directions

There are two useful questions you can ask.

The first is: what salary is this contractor rate roughly equivalent to?

The second is: what contractor rate would I need to comfortably replace this salary?

Those questions sound similar, but approaching the comparison from both directions can make the decision much clearer. For the second one, see How to Convert Salary to a Contractor Rate

Calculate your contractor rate equivalent

Use the Price My Time Contractor Rate to Salary Calculator to enter an hourly or day rate and see an estimated employee salary equivalent based on your own working weeks, expenses, benefits and contractor buffer.

What about hourly contractor rates?

The same principle applies.

If you charge $100 per hour, you first need to estimate how many hours you can realistically bill each day, how many days you expect to bill each week and how many weeks you expect to work.

Only then can you estimate annual contract revenue.

Is a contractor role better because the gross number is higher?

Not necessarily.

A larger gross number can still represent a worse overall deal once you account for expenses, benefits, unpaid time and risk.

The reverse can also be true. A strong contractor offer may more than compensate for those differences.

The point of the comparison is not to prove one type of work is better. It is to make sure you are comparing the same things. To put two specific offers side by side, read Employee vs Contractor: What Should You Compare?