Project Management

Employees vs. Independent contractors: do you know the real price of hiring?

By Alex B. August 14th, 2017

Have you ever thought about the real hourly cost of on-site employees? Global experience has shown that it’s hard enough to calculate your expenses exactly. Employees can cost twice and even triply higher than you expect. Does it sound unreal? Have a look at some facts below.

Imagine you hire an employee at  $20 per hour. First of all, let’s base on your employee’s annual salary. If we take average 2,080 hours a year the total amount will be $41.600. And what about annual vacation, property taxes, insurance, payroll taxes, infrastructural costs? Computer hardware and software licenses, corporate taxes, office equipment, furniture, office supplies, rent, meeting and interview expenses. Probably you also offer some benefits such as annual bonus, subsistence remuneration, compensation for gym and so on. Anyway, all of this constitutes just a small part of possible hidden costs.

Let’s turn these examples into real numbers.

·      You'll have to pay Social Security Tax — 6.2% of each employee’s salary, $2580 a year.

·      Medicare Tax usually costs at least 2.35%, $978 annually.

·      Federal Unemployment Tax comes in at 6%, add $2496.

·      Fringe benefits (retirement contribution, workman’s compensation, educational assistance, employee discounts and many other points) cost 35% (on an average), $14560 each year.

·      General & Administrative (salaries for corporate executives and administrative personnel, legal, accounting fees and so on) — these expenses can't be ignored and you are to pay about 18% of each employee's annual income or $7488 according to our example.

·      Overhead. You can't work without computers, office supplies, equipment and software — the list goes on and on. Your employees won't pay for all of these things — you'll have to pay. Overheads include 25% or $10400 in our situation.

This list can be written endlessly, but now you are aware of what’s usually called «hidden costs». Adding up, we have $80102 vs. $41.600 in the beginning. So the hourly rate is 38.5 dollars instead of 20! Are you surprised? The total amount of annual overhead costs you pay in addition to your employee's hourly wage is unbelievable. It's clear that the numbers we've taken are conservative. The higher hour rate your employee has, the more you'll have to pay.

Now you're probably thinking of question: how to avoid these overheads? One of the answers is to partner with remote contractors. This type of relationship provides you with lots of benefits. The payroll responsibilities for remote partners are significantly less than for employees. You only pay for actual hours worked. No additional taxes, no overheads and hidden costs. If you see $30/hour rate (as an example) you'll actually spend $30 — the real cost of labor. 

Alex B.

Alex B.

Project Manager at iKantam

Browse Recent Posts