The Contractor Tax Trap: Why a Higher Hourly Rate Can Net Less Than a Salaried Job

An hourly contract rate that annualizes to a bigger number than a nearby salaried offer feels like an obvious win. It often isn't, once you account for what a salaried number quietly includes that a contract rate doesn't.

What a salaried number already has baked in

A full-time salary typically comes bundled with employer-paid taxes, health coverage contributions, retirement matching, paid time off, and continuity of pay during slow weeks. A contract rate, especially for independent contractors, usually has none of that built in — it's just the number for hours actually billed.

The math that's easy to skip

• Self-employment tax: in many countries, independent contractors pay both the employee and employer share of payroll-style taxes, which a salaried employee never sees directly because the employer covers half.
• Unpaid time: holidays, sick days, and time between contracts are all unpaid unless you've explicitly priced them into your rate. A contractor who takes three weeks off between engagements has effectively taken a pay cut those weeks that a salaried employee with PTO wouldn't.
• Benefits you now buy yourself: health insurance and retirement contributions that an employer subsidizes for salaried staff become full out-of-pocket costs, and they're rarely trivial.
• Non-billable time: sales calls, invoicing, scoping new work, and admin overhead all eat into hours that aren't reflected in your billed rate.

A rough way to compare fairly

Take your contract rate, multiply by realistic billable hours per year (not a naive 2,080-hour assumption — most independent contractors bill meaningfully fewer), subtract self-funded benefits and the extra tax burden, and compare that number to the salaried offer's total package, not just its base. The gap often shrinks a lot, and sometimes reverses entirely.

When contracting is still clearly worth it

None of this means contracting is a bad deal — it frequently isn't, especially for people who value flexibility, can keep a steady pipeline of work, or live somewhere the tax treatment of self-employment is favorable. The point is simply that the sticker-price hourly rate isn't directly comparable to a salary number without doing the underlying math first.