Contract vs salary: how to compare two offers honestly

Updated 2026-09-02

Dividing a salary by 2,080 hours is the standard way to compare a contract offer with a salaried one, and it is wrong in four separate ways — all of which make the contract look better than it is.

Here is what the naive comparison leaves out, what a contract rate genuinely needs to cover, and the questions that matter more than the headline number.

The comparison everyone gets wrong

Someone is offered a contract role at $75 an hour and a salaried job at $110,000. Which pays better? The near-universal instinct is to divide $110,000 by 2,080, get about $53 an hour, and conclude the contract role wins comfortably.

That answer is wrong by a wide margin, and the errors all point the same way — they make the contract look better than it is. Four things are missing from the naive calculation:

• You do not work 2,080 hours. With leave and public holidays, a salaried employee is paid for 2,080 hours but works closer to 1,900. Their effective hourly rate is already higher than the division suggests.
• The employer half of payroll tax is real money. An employee pays 7.65%; their employer pays another 7.65% that the employee never sees. A contractor pays the full 15.3% themselves.
• Benefits have a cash value. Health contributions, retirement matching, equipment and software typically add 15–30% on top of salary.
• Nobody pays a contractor for August. Holidays, sick days and gaps between clients are unpaid, and they remove 10–15% of annual billing capacity.

Put those together and the $75 rate is often barely ahead of — or behind — the $110,000 salary. The 1099 vs W-2 calculator does this comparison properly, but the reasoning matters as much as the number.

What you are actually being paid for

A contract rate that merely matches a salary is a bad deal, and it is worth being clear about why. The premium is not greed — it is compensation for things the salary absorbs silently:

Risk of non-renewal

A contract can end with two weeks' notice and no severance. A salaried role carries notice periods and, in many cases, redundancy pay. That difference has an expected cost, and the premium is how you get paid for carrying it.

Unbilled time

Finding the next client is work, and it is work nobody pays for. If you spend a quarter of your non-billable hours on business development, that is a real cost that has to be funded out of your rate.

Administration

Invoicing, chasing late payments, bookkeeping, contracts, quarterly taxes and insurance. An employer used to do all of this with someone else's money. It is now your evenings.

No safety net

No unemployment insurance, no workers' compensation, no paid sick leave, no employer disability cover. Each of these is an insurance policy you are now funding yourself — and the premiums are real.

The factors a spreadsheet cannot price

There is a point at which the financial comparison stops being the deciding factor, and it usually arrives faster than people expect. Three things that legitimately outweigh a modest financial difference:

Optionality

Contracting lets you test an industry, a technology or a company without committing. That has real value early in a career, even at a lower effective rate, because the information you gain changes every subsequent decision.

Skill compounding

A salaried role at a company with strong engineers or designers may teach you more in two years than four years of solo contract work. If the rate difference is 10%, the learning difference can dominate — and it compounds in your future rate in a way the current contract does not.

Volatility tolerance

This is personal and should not be hand-waved. Some people genuinely do not sleep well without a predictable paycheque, and the stress has a cost that does not appear in any calculator. If irregular income would make you miserable, a 15% premium is not obviously worth it.

Questions to ask before you take the contract

Contract roles vary enormously in quality, and the terms often matter more than the headline rate. Before signing:

• How many hours per week are actually expected? A role advertised at 40 hours that routinely requires 50 changes the hourly rate by 20%.
• Is there a real end date, or is this rolling? Rolling contracts are renewed at the client's discretion, which is closer to employment without the security.
• Who owns the intellectual property? Some contracts claim everything you produce, including work done on your own time. This is negotiable and worth reading carefully.
• What is the payment term? Net 30 is normal; net 60 or 90 means you are lending the client money interest-free.
• Is there a restriction on other clients? An exclusivity clause that prevents other work while allowing termination on two weeks' notice is a genuinely bad combination.
• Are you actually a contractor? In some jurisdictions, working set hours under someone's direction for a single client can mean you are misclassified. This has consequences for both parties.

A reasonable way to decide

Work out the break-even rate first, using your own numbers rather than a rule of thumb. Then apply a premium for the risk you are taking — most people settle somewhere between 20% and 40% above break-even, depending on how stable the contract looks and how much of a buffer they have.

Then check the two things that make the premium real rather than nominal. Do you have a buffer of at least three months? If not, the volatility risk is not hypothetical and the premium should be higher. And does the work build something — a skill, a portfolio, a relationship — that outlasts the contract? If it does, that has value the comparison does not capture.

Finally, be honest about which direction the error hurts more. Overpricing a contract costs you one opportunity. Underpricing it costs you every month for as long as it runs, and quietly teaches a client what your time is worth.