Every comparison involving the cost of a person goes wrong at the same point: someone uses the salary. Build versus buy, contractor versus employee, whether a project pays for itself, what an hour of someone's time is worth. The salary is the visible number and it is not the cost.
Take $85,000 of base salary with a 12 per cent employer retirement contribution, 4.85 per cent payroll tax, 1.5 per cent workers compensation insurance, 2 per cent of other on-costs and $6,000 a year of fixed per-head cost for equipment, software and workspace. The total employment cost calculator puts that at $108,297.50.
The multiplier is the number to remember
That is 1.274 times the salary, or $23,297.50 of on-costs. Of those, $17,297.50 are the percentage items and $6,000 is fixed per head, and the split matters: percentage costs scale with seniority while fixed costs do not, so the multiplier is highest on junior roles and compresses as salaries rise.
Carry the multiplier rather than the components. For any rough comparison, a salary times roughly 1.3 is closer to the truth than the salary, and it takes one multiplication. Every rate in it is a field on the page, because payroll tax thresholds, contribution rates and insurance premiums differ by jurisdiction and change most years.
Per hour, not per year
Divide by productive hours rather than paid hours and the figure sharpens again. At 1,800 productive hours a year, which allows for leave, public holidays, training and the ordinary non-productive share of a working year, that employee costs $60.17 an hour.
That is the figure to put against a quote. A contractor at $90 an hour is not fifty per cent more expensive than an employee on $85,000; they are about fifty per cent more expensive than $60.17, and they come without the leave liability, the notice period or the fixed per-head costs. Whether that trade is worth it is a real question, but it cannot even be asked properly until both sides are in the same units.
From the other side of the same table, the freelance hourly rate calculator works out what a contractor has to charge to reach a given take-home once unbillable time, business costs and tax are taken out. The two pages are the same arithmetic viewed from opposite ends, and running both is a quick way to see why the rates look so far apart.
Hiring has its own cost
Recruitment sits outside the employment cost entirely and gets forgotten in the same way. Twenty thousand dollars of external and internal recruiting spend across five hires is $4,000 per hire, which the cost per hire calculator also expresses as 4.71 per cent of starting salary, the form that makes it comparable across roles.
Put the two together and a departure costs the recruiting spend to replace, plus the ramp time before the replacement is productive, on top of a total employment cost that was already a quarter higher than the salary line suggested. For what the whole headcount returns rather than costs, revenue per employee is the other half of the picture.