You're offered a contract role at $75/hour and you're trying to figure out if that's better than your $120,000 salary. Or maybe you're leaving a salaried job and need to know what hourly rate would keep you at the same income level. Either way, the conversion is not as simple as dividing your salary by 2,080.
The real multiplier is somewhere between 1.4x and 1.6x — meaning a $120K employee actually costs their employer $168,000–$192,000 in total compensation. That's the number you should be comparing against, not the base salary.
What Employees Actually Cost
When a company hires you as a W-2 employee at $120,000/year, their actual cost is significantly higher. Here's what they pay that you never see:
| Cost Component | Amount | % of Salary |
|---|---|---|
| Base salary | $120,000 | 100% |
| Employer payroll taxes (FICA) | $9,180 | 7.65% |
| Health insurance (employer portion) | $8,400 | 7% |
| 401(k) match (typical 4%) | $4,800 | 4% |
| Paid time off (3 weeks) | $6,923 | 5.8% |
| Paid holidays (10 days) | $4,615 | 3.8% |
| Disability/life insurance | $1,200 | 1% |
| Workers' comp, unemployment insurance | $2,400 | 2% |
| Training, equipment, overhead | $3,000 | 2.5% |
| Total employer cost | $160,518 | 133.8% |
So a $120K employee costs the company roughly $160K. That's the number a contractor rate needs to beat — not the base salary.
The Quick Conversion Formula
For a quick estimate:
Contractor Rate = (Annual Salary × 1.4 to 1.6) ÷ 2,080 hours
Using our $120K example:
- Conservative (1.4x): $120,000 × 1.4 = $168,000 ÷ 2,080 = $81/hour
- Moderate (1.5x): $120,000 × 1.5 = $180,000 ÷ 2,080 = $87/hour
- Comprehensive (1.6x): $120,000 × 1.6 = $192,000 ÷ 2,080 = $92/hour
So that $75/hour contract offer against a $120K salary? It's a pay cut. You'd need at least $81/hour to break even, and realistically $87–$92/hour to match total compensation.
What Each Multiplier Covers
1.4x (bare minimum) covers payroll taxes and basic benefits. Use this if you already have health insurance through a spouse or if you're young with minimal benefit needs.
1.5x (standard) covers taxes, health insurance, retirement, and some PTO equivalent. This is the most commonly cited multiplier and works for most situations.
1.6x+ (comprehensive) covers everything above plus a profit margin, business expenses, and a buffer for gaps between contracts. Use this if you want true equivalence including job security considerations.
Side-by-Side: $120K Employee vs Contractor
W-2 Employee @ $120K
- $120,000 salary
- Employer pays half FICA
- Health insurance provided
- 401(k) with 4% match
- 3 weeks paid vacation
- 10 paid holidays
- Disability insurance
- Equipment provided
- Job security / severance
1099 Contractor @ $87/hr
- ~$180,960/yr (2,080 hrs)
- You pay full 15.3% SE tax
- You buy your own (~$7,200/yr)
- You fund your own retirement
- Time off = $0 income
- No paid holidays
- You buy your own
- You buy your own
- Contract can end anytime
When you see it laid out like this, the "higher number" on the contractor side starts to look a lot more even. And that's the point — a contractor charging $87/hour is not making more than a $120K employee. They're making roughly the same.
Common Salary-to-Rate Conversions
Here's a quick reference table using the 1.5x multiplier:
| Annual Salary | Equivalent Hourly Rate | Equivalent Day Rate |
|---|---|---|
| $60,000 | $43/hr | $346/day |
| $75,000 | $54/hr | $433/day |
| $90,000 | $65/hr | $519/day |
| $100,000 | $72/hr | $577/day |
| $120,000 | $87/hr | $692/day |
| $150,000 | $108/hr | $865/day |
| $175,000 | $126/hr | $1,010/day |
| $200,000 | $144/hr | $1,154/day |
When Contracting Actually Pays More
Contracting isn't always a wash. It genuinely pays more when:
- The rate is well above the multiplier. If you're offered $120/hour against a $120K salary, that's a 1.92x multiplier — you'll come out ahead even after covering all your own benefits.
- You can write off significant expenses. Contractors get deductions employees don't — home office, equipment, mileage, professional development, health insurance premiums.
- You work for multiple clients. Diversified income is more stable than depending on one employer, and you can fill gaps between contracts with other work.
- You're in a high-demand specialty. Companies pay premium rates for niche skills they can't easily hire for full-time.
When to Stay Salaried
Salaried employment is the better financial choice when:
- The contract rate is below 1.4x your salary equivalent
- You have significant medical needs and value employer-subsidized health insurance
- You value stability and predictable income over flexibility
- The company offers equity, RSUs, or bonuses that substantially increase total compensation
- You don't have the discipline to set aside money for taxes and retirement
Get Your Exact Number
Don't rely on multipliers — calculate your precise contractor rate based on your actual expenses, tax situation, and income goals.
Use the Free Calculator →The Bottom Line
The #1 mistake people make when comparing contractor rates to salaries is forgetting the hidden 30–40% that employers spend on top of your salary. When someone offers you a "great" contractor rate that's only 10% above your salary-per-hour, you're actually taking a pay cut.
Use the 1.5x multiplier as your baseline, adjust up or down based on your specific benefits needs, and never accept a contract rate that doesn't at least match the 1.4x minimum. Your future self — and your tax bill — will thank you.