The Contract Rate to Salary Equivalency Formula
Start with annual gross contract income: Rate × Billable Hours. Then subtract self-employment tax (15.3% on net), health insurance costs ($6,000–$15,000), self-paid retirement (no match), unpaid time off, and business expenses. The result is your net annual 'salary equivalent' from contracting.
Contractor vs. salaried equivalency at $75/hr vs. $110,000 salary
| Item | Contractor at $75/hr | Salaried at $110,000 |
|---|---|---|
| Gross annual | $75 × 1,800 hrs = $135,000 | $110,000 |
| SE tax (half deductible) | ~$9,000 net effect | $0 additional vs. W-2 |
| Health insurance | $10,000 self-paid | $1,500 employee share |
| Retirement match lost | $0 match | $3,300 (3% of $110K) |
| Unpaid vacation (15 days) | $8,125 lost income | $0 (paid)) |
| Business expenses | $3,000 (software, equipment) | $0 (employer provides) |
| Net equivalent income | ~$104,875 | $111,800 total comp |
The contractor wins financially when: (1) rate is significantly above the W-2 equivalent (50%+, not just 30%); (2) billable hours are consistently high (1,900+/year); (3) business deductions are maximized; and (4) a solo 401(k) shelters significant income from taxes.
Corp-to-Corp vs. W-2 Contract: Another Layer
Some contractors operate as an S-Corp or LLC (corp-to-corp), which allows them to pay themselves a reasonable salary and take remaining profits as distributions — reducing SE tax on the distribution portion. This adds complexity but can save $5,000–$15,000/year in taxes for high-earning contractors.
When to Accept the Salaried Offer
Accept the salaried conversion when: the salary meets your net equivalent threshold, the role offers significant career advancement, benefits are strong (especially health insurance and retirement), you value income predictability, or the contracting work is becoming unreliable. Reject it when the salary falls more than 10% below your contractor net equivalent without other compensating factors.
Compare Your Contract Rate to a Salary Offer
Run the full equivalency calculation including tax, benefits, and time off.