How to Convert Salary to a Contractor Rate

The basic contractor rate formula

A useful starting point is:

(Salary + lost benefits + annual business expenses) ÷ realistic annual billable hours

That gives you your approximate break-even contractor rate.

You can then add a buffer for the extra uncertainty and risk that comes with contracting.

Example: Converting a $100,000 salary

Suppose you currently earn $100,000 per year.

You estimate that the employee benefits you are giving up are worth around $10,000 per year, and you expect to spend around $5,000 running your contracting business.

Your total annual target becomes:

$100,000 + $10,000 + $5,000 = $115,000

Now you need to work out how many hours you can realistically invoice.

Suppose you plan to work 40 hours a week for 46 weeks of the year.

That gives you:

40 × 46 = 1,840 working hours

But not every one of those hours will necessarily be billable.

If you estimate that 75% of your working time can be invoiced to clients:

1,840 × 75% = 1,380 billable hours

Now divide your $115,000 target by those 1,380 hours:

$115,000 ÷ 1,380 = $83.33 per hour

That is your approximate break-even rate based on those assumptions.

If you then add a 15% contractor buffer:

$83.33 × 1.15 = $95.83

A sensible recommended contractor rate would therefore be around:

$96 per hour

If you bill eight hours in a day, that is approximately:

$767 per day

The difference between $48 an hour and $96 an hour is why simply dividing your salary by 2,080 can be so misleading.

Include the benefits you are giving up

Salary is only one part of employee compensation.

Depending on your job and country, your employer may also contribute toward retirement, pension or superannuation, health insurance, bonuses, equipment, paid leave or other benefits.

You do not need to calculate every benefit perfectly. The point is to recognise that leaving a $100,000 job can mean giving up more than $100,000 of annual value.

If your benefits are worth roughly $10,000, include that $10,000 in the amount your contracting income needs to replace.

Use realistic working weeks

A year has 52 weeks, but assuming you will work and bill for all 52 is usually unrealistic.

You may want holidays. You may get sick. You may spend time between projects. There may also be periods where clients delay decisions or contracts start later than expected.

Rather than assuming the maximum possible number of weeks, choose the number you realistically expect to work.

The lower your number of working weeks, the higher your required rate becomes.

Not every working hour is billable

This is one of the biggest differences between employment and contracting.

You might work for eight hours but only invoice a client for six of them.

The rest could be spent writing proposals, answering enquiries, doing bookkeeping, managing invoices, learning new skills, marketing yourself or handling general administration.

That time still exists even though nobody is directly paying you for it.

Your billable percentage lets you account for this. If you are not sure where the line sits, see What Counts as Billable Time?

Add your business expenses

Contractors often pay costs that an employer would normally cover.

These might include software, laptops, accounting, insurance, professional memberships, travel, equipment, contractors or other business services.

If you expect $5,000 of annual expenses, your rate needs to generate that extra $5,000 before you have replaced your salary.

Add a contractor buffer

Your break-even rate tells you what you need under the assumptions you entered.

That does not necessarily mean it is the rate you should quote.

Contracting generally involves more uncertainty than employment. Contracts can end. Clients can pause work. Payments can be delayed. Expenses can be higher than expected.

A buffer gives you some room for those situations.

For example, if your break-even rate is $83 an hour and you add a 15% buffer, your recommended rate becomes about $96 an hour.

That does not mean every client will pay $96. It means $96 is a more realistic target based on the financial assumptions you entered.

Hourly rate or day rate?

Some contractors quote hourly. Others quote by the day.

If your recommended hourly rate is $96 and you consider eight hours a billable day:

$96 × 8 = $768 per day

That does not mean you must bill eight separate hourly units. A day rate can simply be a convenient way of pricing a full day of your availability and work.

For more on comparing the two, read Contractor Day Rate vs Salary: How to Compare Them Properly

Common mistake: treating the calculated rate as a market rate

Your calculated rate tells you what you need to earn based on your circumstances.

It does not tell you exactly what the market will pay.

Experience, specialist skills, industry, location, urgency, reputation and client budgets can all influence the amount you are able to charge.

Think of the calculation as your financial starting point.

If the market supports a higher rate, you may decide to charge more.

If the market only supports a significantly lower rate, that is useful information too. It may mean contracting is less attractive than it first appeared.

Calculate your own contractor rate

Rather than trying to build all of these assumptions into a spreadsheet, use the Price My Time Salary to Contractor Rate Calculator.

Enter your salary, benefits, expenses, working weeks, billable percentage and preferred buffer, and you can immediately see your break-even hourly rate, recommended rate and day rate.

Should tax be included?

Price My Time does not calculate personal income tax in this comparison.

Tax rules can vary significantly depending on where you live, your business structure and your personal circumstances.

The calculator focuses on the underlying economics of replacing your salary, benefits, expenses and non-billable time. You can then consider your own tax position separately.

What if I already know my day rate?

If you have already been offered a contractor rate and want to know what employee salary it is roughly equivalent to, use the Contractor Rate to Salary Calculator instead.