A contract rate has to cover everything an employer would otherwise provide: self-employment taxes, health coverage, retirement contributions, unpaid time off, and periods between engagements. Converting a salary to an equivalent contract rate typically means adding 30% to 50%, and a contract rate that looks generous against a salary frequently is not once those are accounted for.
The three arrangements
W-2 employment. The employer withholds tax, pays employer payroll taxes, and usually provides benefits. You get notice, unemployment eligibility and paid leave.
Independent contracting. You are your own employer. You pay both halves of the payroll taxes, buy your own coverage, fund your own retirement, and are paid only for time worked.
Contract-to-hire. Contract terms with a stated intention to convert. The intention is not a commitment, and the conversion salary is frequently not agreed at the outset — which is the thing to fix before starting rather than after.
What a contract rate has to absorb
The employer’s half of payroll taxes, which is a fixed percentage you now pay yourself. Health coverage at individual rather than group rates, which is materially worse pricing. Retirement contributions with no match. And time: every holiday, every sick day and every gap between engagements is unpaid.
That last one is the largest and the most often ignored. Working forty-six weeks a year rather than fifty-two is a twelve per cent reduction before anything else is counted.
The conversion, roughly
Take the salary, add the employer payroll taxes you will now pay, add what coverage and retirement will cost you, then divide by the weeks you actually expect to bill rather than fifty-two. The result is usually thirty to fifty per cent above the salary, and higher for anyone with a family to cover.
Do it with your own numbers rather than a rule of thumb — the coverage figure in particular varies enormously by circumstance.
What contracting buys
Genuine things. Control over what you take, the ability to raise rates without a review cycle, deductible expenses, and in some fields simply higher gross. For people who bill consistently and manage the gaps well, it can win clearly.
The risk is real too, and it falls entirely on you: no notice, no unemployment eligibility in most cases, and no paid recovery from anything.
Contract-to-hire, specifically
Agree the conversion salary and the conversion date in writing before starting. Without both, the conversion becomes a negotiation conducted from the weakest position you will ever hold — inside the job, having already demonstrated you will do it at the current rate.
Common questions
How much higher should a contract rate be?
Typically 30% to 50% above an equivalent salary, and more for anyone covering a family. Run it with your own figures rather than a rule of thumb.
What does a contract rate have to cover?
Both halves of payroll taxes, individual-rate health coverage, your own retirement contributions with no match, and every unpaid day u2014 holidays, sickness and gaps between engagements.
What is the most commonly ignored cost?
Unpaid weeks. Billing forty-six weeks instead of fifty-two is a twelve per cent reduction before any other cost is counted.
Is contract-to-hire a good deal?
It can be, but agree the conversion salary and date in writing before starting. Otherwise the conversion is negotiated from inside the job, having already shown you will do it at the current rate.
What does contracting genuinely buy?
Control over what you take, rate increases without a review cycle, deductible expenses, and often higher gross. The risk u2014 no notice, usually no unemployment eligibility u2014 falls entirely on you.