I've heard many people mention that as a contract software engineer you can make 20-30% more per hour than if you were salaried - because of no benefits. However, when I look at contractor rates on sites like glassdoor.com for senior positions, I see very low hourly rates. So my question is, for the following position at a big company (say Microsoft) in silicon valley, is there anyone who can attest that he/she actually makes much more as a contractor?

Title: Senior Software engineer Experience: 8 years Salaried offer: $125K+ benefits

This salary should translate to about $85/hour as a contractor. Is there anyone who makes this much or more? I've seen figures of $100/hour and even higher, but everytime I talk to a contracting firm, them seem to be maxing out at 70/hour?

I have to make a really important decision very soon and I've searched all over the net and can't find a solid answer. I'd appreciate if people can give me some answers here rather than a lecture on ethics.

  • 9
    Are you asking "Do there exist contractors that make more than $100/hr"? Are you asking "Are there contractors at some particular big company that are making $100/hr"? Are you asking "Would a large company be willing to hire me as a contractor at $100/hr rather than as an employee making $125k/year?" Or are you asking something else? Jun 13, 2012 at 23:51
  • What I'm asking is do companies actually(normally) pay 20-30% more per hour to contractors than salaried employies because the offers I'm getting (salaried vs contract) don't back that up.
    – tunafish24
    Jun 14, 2012 at 0:00
  • One thing you are missing in your formula is that most salaried people don't get overtime, and most IT people work it in spades.
    – JohnFx
    Jun 14, 2012 at 2:29
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    actually in Europe it's like 50%-100% more for contractor, because then employer doesn't have to pay: vacation time (which is 25-28 workdays depending on country), medical insurance, retirement contribution, etc. And of course there is full flexibility of contract termination, which is not the case with full-timers.
    – vartec
    Nov 22, 2012 at 10:46
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    Yes, as vartec said, when corp-to-corp, the multiplier is mostly between 2 and 3 (i.e. 100% to 200% more) because of all of the hidden costs of regular employees that contractors SHOULD be charging for, like health benefits, rent, computers and equipment, SS and Medicare taxes, accountant fees, and other costs of business. I've put together a detailed spreadsheet for this purpose and even if I skimp heavily on most of these costs, the multiplier never goes below 2. So most of the answers above (and below) are really uninformed or people working for much less than market in the end.
    – daaxix
    Dec 4, 2013 at 5:03

12 Answers 12


First of all, in the US in the IT area, there are essentially two types of contracting.

The first, usually called W2, means that you're an employee of the contracting agency. They handle the billing and other overhead, pay payroll taxes and usually offer benefits (quality varies by company). They bill the client, usually about 50% or more higher than what you'll see. For example, they bill the client company $80/hr for your time and pay you $45/hr.

The second, usually called 1099, corp-to-corp or freelance, means that you typically work directly for a company on a contract basis. Occasionally, you'll go through an agency but most people working this way prefer to cut out the middleman when possible. You bill your hours, pay all the taxes and don't have any benefits. The good part is that if you bill the client $80/hr all that money is yours, at least until you have to pay taxes (quarterly). Most people I know who work this way have a spouse who has benefits through their job.

In general, you'll see about 20-30% more on an annual basis as a W2 contractor. As a 1099 contractor, you'll see about 50-75% more although most of this goes for taxes and often you'll end up making less than the comparable W2 position once Uncle Sam and your state get their cut.

Other downsides of working as a contractor you don't get paid vacation and you're typically treated as disposable goods by the client. You can become the fall guy for regular employees if things go bad, even if they aren't your fault. You're likely to work less than 50 40 hour weeks in a year so you make have unexpected dry spells between contracts/projects. Even as a W2 contractor, but especially as 1099, you accept more risk and usually harder work for a higher monetary reward.

Lastly, as a contractor of either type, you're most likely to find yourself working in a standard corporate environment rather than with a Microsoft/Facebook/Google type company. You'll probably be doing jobs like maintaining old apps, doing work that the client company's employees don't know how to do or being brought in as a last minute replacement/addition on a failing project.

One more type is the contract-to-perm position. In this situation, a company wants to hire you but they want to give you a trial run as a contractor first. Since it's easier and less expensive for them to drop a contractor than to fire an employee, many companies use this. Typically, this is like the W2 contractor with a set hire-by date.

  • 3
    You said 1099 contractor makes 50-75% more but most of that goes in taxes. The only tax difference I find is that 1099 guy has to pay about 7.5% more for Social Security and thats it. Am I missing something?
    – tunafish24
    Jun 14, 2012 at 5:54
  • 6
    @tunafish24: In the US besides the Social security taxes there are other costs that the average employee doesn't consider. Besides benefits like insurance they have to realize that if you can't bill the hours, you don't get paid. So vacation, holiday and sick pay must become a percentage of the rates you bill. That eats into the 50-70%, but they aren't taxes. Jun 14, 2012 at 11:00
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    @tunafish24 - You also have to pay federal and state unemployment taxes (amount varies) and state business taxes (varies). If Obamacare survives, there will be additional taxes plus mandatory health insurance purchasing to consider. There are also additional expenses, some deductible, some not, some that can raise audit flags and are risky to use.
    – jfrankcarr
    Jun 14, 2012 at 11:41
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    @jfrankcarr: Are you sure that 1099 have to pay unemployment taxes? I couldn't confirm that online. AFAIK, 1099 don't get any unemplyment benefits, so I don't see why they would need to pay that tax. In case of W2's, employer is supposed to cover that, so it's not included in the rate at all.
    – tunafish24
    Jun 15, 2012 at 20:54
  • 10
    Having cash instead of 401k when young is a mistake really but thats a whole other issue...
    – Rig
    Jun 18, 2012 at 13:38

I'm a full-time contractor and I do make more per hour than I could at a company, but I'm not getting my contracting gigs via sites where you shop for gigs - it's all word-of-mouth and personal contacts that I developed by working full time in a marketing agency. If you don't have those kinds of contacts and experience, the higher rate may be harder to get and keep.

I also agree with all the people who've pointed out that the higher rate does not equal a higher annual income due to taxes, health insurance and the time you don't work. But, I personally switched over for the quality of life and that makes up for all of it. I love working from home and getting to choose when and how much vacation I can take, albeit unpaid. Not to mention choosing my clients being able to stay fresh by taking on new projects rather than spending most of my time maintaining older code.

Best of luck with your decision!

  • 3
    You've nailed it! That's exactly the reason why I want to work as a contractor. Tax-wise I only see a 7.5% increase, so if I'm making 20-30% more, then after working 10 months I should have enough money saved, that I would had I worked 12 months. That leaves about two months to take a stress-free vacation and look for another contract. Not to mention time you can learn new skills etc.
    – tunafish24
    Jun 15, 2012 at 20:47
  • 3
    Remember that you may not be working 8 hours a day every day, though - there are some weeks I only work a few hours a day, some where I work 10+. So the two months of vacation time may be reaaallly spread out and not exactly of your choosing. BUT, if you're the kind of person who can flow with that unreliability in terms of steady monthly income (it really stresses some people out) I definitely recommend it. Plus you can of course take your work on the road as you never have to go into the office. :) 'Luck!
    – Michelle
    Jun 16, 2012 at 0:25
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    One thing to consider is that while freelancers get to work from home and choose their work hours fairly often, W2 contractors are usually expected to be in the office during certain business hours to get paid.
    – jfrankcarr
    Jun 17, 2012 at 21:43
  • @Michelle: Yea, I'm pretty comfortable with money not coming in for a month or so, as long as I make up for it during the time I'm working. I guess, like you, I prefer free-time between contracts over a steady job.
    – tunafish24
    Jun 19, 2012 at 6:45
  • 2
    @tunafish24 - Contracting works well when you are highly skilled than the average peer & more importantly, when there is enough demand for your skills. Otherwise, your income as a contractor will be unpredictable. Feb 2, 2019 at 1:46

You asked if contractors take home more than the equivalent salaried employee.

It depends.

Many freelancers/contractors charge too little, resulting in them working for less than the equivalent employee.

The following costs must be accounted for accurately in order to compute an hourly rate just to keep you on par with the salaried employee

  • G & A (this is accounting speak for computers, software costs, office space, electricity, rent, travel, professional development; things you cannot charge a client for directly)

  • Overhead (this is mostly labor that you cannot charge to a client, but sometimes includes things I stuck in G & A above)

  • Fringe benefits (this is retirement, health insurance, liability insurance, workman's comp, taxes, paid time off)

  • Profit (you need a little of this, you are taking on some risk by not being permanently employed)

Furthermore, the G & A + overhead costs for a contractor are high because contractors typically only work between 20 and 30 hours per week. If you are billing by the hour, you can only bill the actual hours worked for a client.

Fortunately for this answer, I recently finished a contract where the scope of the work which I was hired for was equivalent to an engineer in the $115-135,000 annual salary range. I just happened to pick $125,000 as my break even calculation number. Note that I live in Arizona, USA.

For this calculation I lumped G & A and Overhead costs together, since for me they are really the same thing when working out of my home office, and I don't have any other employees.

My annualized costs were :

  • G & A + Overhead : $23,000 (note that this is with no rent, but includes computer upkeep and software licensing, travel, phone, accountant, invoicing software, and other test hardware)

  • Fringe Benefits : $43,000 (this includes health, all taxes, liability insurance, etc.)

The above were actual costs.

Now I need to calculate the hourly rate. To accomplish this task, I need to compute how many hours per week that I work on an annualized basis.

I actually worked about 30-32 hours per week on the contract, the rest of the time I was working on billing, accounting, hour tracking, task reports, etc. (all unbillable to the client).

I also need to remember vacation for this calculation, and I'll use 6 weeks of paid time off.

My total billable hours were (52 - 6) weeks*32 hours/week = 1472 hours.

My total costs were $23,000 + $43,000 + $125,000 = $191,000.

This means that my hourly rate must be $191,000/1472 hours = $129.76/hour, just to break even!

This is the no profit rate.

This rate is 2.16 times the 40 hour equivalent of $125,000 per year ($60.10/hour), which is much higher than the OP's 1.3-1.5 multiplier.

Before contracting and setting a rate, you need to figure out all of these costs for yourself, then do the above break even calculation.

Some things you must pay for are :

  • Software for commercial use (sans alternatives)
  • Taxes
  • Various insurance (depends on location)
  • Hardware, electricity, internet, etc. for your business

but other costs are up to you. I refuse to go without health insurance, for instance.

If you cannot close contracts at more than the break even number (for hourly billing), then you should attempt to obtain a regular salaried position.

If you choose to not include benefits, retirement costs, etc. in your calculations, you are effectively working for below market rate.

  • This is the answer. It really comes down to: only go freelancing when you are an IT guy + a decent accountant at the same time. I have seen so many people failing because they weren't doing the proper calculations. When you don't do that and work for below 2x ratio you are basically lying to yourself. Btw: Most people don't even reach so many billable hours/month.
    – s1lv3r
    Dec 29, 2014 at 13:01
  • 1
    Yes, this was a 6 month hourly contract, so medium length, with more work than I could possibly finish. In the end, they thought I was too expensive and did not want to continue, even though I was probably less than an actual employee due to lower overhead costs...many in the business discount the rate if the contract is longer, but this still requires the above calculation with the number of hours that you are contracted to work...
    – daaxix
    Jan 1, 2015 at 0:18
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    I just billed 127 hours over a 3 week period and it took me 20 minutes to create and send the invoice. You don't need to waste your time being an accountant.
    – Beanwah
    Aug 18, 2015 at 3:16
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    @Beanwah, who does your S-corp (or other entity) taxes? What about state taxes? You typically have to pay these quarterly or you will be fined in the US. Do you have an S-corp? How do you pay yourself? Did you make an accounting model to ensure that all of your costs were paid? What about health insurance and logistics? What about retirement? If you have a regular job where all those things are taken care of for you, then you aren't a freelancer and there is a lot more to it than just invoicing.
    – daaxix
    Aug 19, 2015 at 5:09
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    I 1099 as an individual so no S-corp. So I don't have to worry about paying myself. And yes, pay quarterly taxes. I have health insurance through the exchange, and make annual contributions to an IRA. I just don't see how that can take 8 hours per week? Maybe I'm doing it wrong :). Also, I use Zoho, a free service, to do my invoicing.
    – Beanwah
    Aug 19, 2015 at 16:41

Yes, there certainly are cases where companies pay 20-30% more per hour (and often much more than that) for consultants rather than employees. Of course, if you go through a consulting company, the consulting company will take a chunk of that because they handle things like marketing, generating leads, billing, etc. and may offer some benefits. If you want to maximize your per hour pay, you'll want to do all of that yourself-- of course, that means that you'll need to spend lots of time doing things other than being a software developer.

If you are in the United States, make sure that if you go the contracting route, that you'll be responsible for your own health insurance and self-employment taxes (the employer portion of Social Security taxes) that will easily eat through 30% of your income (hence you probably want more than that). And that's before you add in things like insurance, lawyers, accountants, retirement plans, holidays, vacations, time between contracts etc. Plus, you'll be doing lots of non-software development work on the side so you'll have to be good at sales and marketing, negotiating contracts, managing client relationships, and everything else that comes with running a business in addition to being a good developer.

And, of course, that assumes that the company is happy with either an employee or a contractor. For most roles, companies prefer one or the other. Generally, companies want to have employees for long-term open-ended projects and wouldn't want to have a contractor for that sort of role. On the other hand, if companies are looking for particular expertise for a particular project over a particular period, they'd rather have a contractor rather than an employee that they potentially have to fire or find a new role for when the project ends.

  • Yes, I suspect it's the agencies keeping a lot as their cut. I've thought of going solo, but the obvious problem is finding a direct contract position. Almost all of the contract jobs on dice are by consulting companies, is there any other website that's good for finding direct consulting positions?
    – tunafish24
    Jun 14, 2012 at 5:57
  • @tunafish24 - Most positions that you'll find advertised are positions through other companies. If you want to be a freelance developer, you'll need to invest a lot more resources finding these sorts of positions-- you'll need to be your company's sales and marketing department in addition to being a developer. Jun 14, 2012 at 15:35
  • I agree, looks like I'd have to establish some contacts before I can get to the magical $100/hr. Another thing, I've noticed is the non-compete clause that many agencies have, how easy is it to get them to remove that?
    – tunafish24
    Jun 15, 2012 at 20:56
  • 1
    @tunafish24 - If you are intending to be a W2 employee of the consulting company, likely very hard, at least assuming that you're talking about the clauses that prevent you from working for other companies simultaneously or working for customers of the consulting company later in a 1099 role. Jun 15, 2012 at 20:58

Absolutely they make a ton more, much more than 20-30% !

Of course if they use an agency which takes a cut they get to keep it all!

Other than that they just have to pay their own health benefits. Plus cover their own vacation pay. Plus 401k. Plus training costs in new tools. Plus Dental. Plus accountant. Plus some clients that don't pay / go bust. All sorts of fun stuff ;)

Been there, done that, didn't like it much.


You're comparing apples to oranges.

A W2 person is guaranteed* her 2,080 hours per year, so if her $100k annual salary were translated to an hourly rate that would be just a hair under $50/hr.

This doesn't translate to the Contract World.

As a contractor, I have to bill double that rate, minimum, to maintain the same lifestyle. So, we're talking $100/hr. This is because I assume I'll only have 1,040 billable hours per year, due to illness, vacation, dry spells and time spent beating the bushes for new clients.

Of course I pay more taxes, and get no benefits. But I get to deduct my mileage, computer, phone, home office (in a separate building, thank you), accounting fees, etc.

Now let's answer your REAL question -- the one you didn't ask: "How do I make more money?"

The answer is you provide enough value so that someone is willing to pay you the amount you want for your services. If you can't provide that value as an employee, you sure as sand won't be able to do it as a contractor.

*Assuming a perfect world without crazy bosses, predatory corporate culture and M&As.


A smart contractor will adjust their fee to consider, taxes, insurance and other costs to make sure they have a certain amount of take home pay.

You also need to consider the short-term and long-term advantages and disadvantages to both the contractor and the company doing the hiring.

  • short-term projects may pay more per hour, but the company spends less than having a full-time employee who they don't have full-time work to do for a full year.
  • flexibility in expertise. The time it takes to find one person who can do it all can be much longer than finding 3 contractors with specific skills and are willing to work for a few months each on a project.
  • contractors have to charge more per billable hour to compensate for the time they have no work. Bottom line is you have to make enough over a period of time.

If you want to go independant in IT, there is definitely the needs for. I would choose my clients more into the small and medium sized companies (50 to 200 employees, making about 20 to 200 million dollars revenue a year). They usually lack of expertise in specific area of IT.

It is easier if you know people in th eindustry of course, especially in boutique consulting companis. They usually charge clients around the 150 to 200 dollars an hour and they give you back from 100 to 150 dollars.

The clients are usually reasonnable and the projects are interesting.

I have started being independant this way and clients loved me enough to pursue working with me way after my relationship with consulting companies, some CTO going from companies to companies.

Do not discard developers you meet a client's onsites, they will be your allies in different companies in the future because they will go to different companies and will tell about your expertise to their bosses.

I have been fortunate in having clients this way, remotely and I think they are definitely room for independant contracting.

Rate wise, I have been offering my services from 40 dollars to 175 dollars an hour, and I do mostly 125 dollars an hour. It depends how much you want to work for. You can work definitely for 300K a year but you can also do 75K, depending on how much you want to work and depending on where you live (purchasing power, ability to find job onsite, etc...).

I think being independant in the US is a tough choice because there is not much edge besides maybe 20% benefits you do not get. Competition for the employees are low because they can get fired easily. I am leaving in France and it is actually interesting because being independant can offer more work because employers do not need to have the burden to hire someone they have to drag potentially. It is less risky and it is actually cheaper as benefits in France (social charges mainly) are a real buden for the companies. Additionally, working for 125 dollars an hour from France, comparing to the purchasing power is not that bad.

Considering working from a remote country where the purchasig power would be good, if there is good internet might be something to think about...

France might not be the best choice of course but this is because of my family and quality of life choice but there are probably many choices you can do: working from Costa Rica, Spain, Gualapogos Islands, etc.... you name it. This is another decision that can be handy.


I would say that piece of wisdom applies more to typical IT shops than to software companies.

The typical situation is an IT shop at a company that makes widgets, and has some software that is a "cost center." They want to have a base of employees who can support their systems, and aren't terribly likely to move any time soon. Occasionally, they will have projects where they will need to ramp up their staff or acquire a specific skill set. Or they may like to have a "buffer" if they need to cut expenses fast without risking the hassle of laying off employees.

In this case, the typical contractor will be making more than the typical employee. The trade-off is for stability. If there are budget cuts, the contractor will likely go before the employee. On the other side, the employees' skills are likely more localized and domain-specific than the contractors', so they may not have as much leverage to negotiate raises, etc.

Again, there are exceptions, but I think this is a rough picture at your typical IT shop.


For companies, that make software as their main business, the model is a little different. They want talent, and are probably willing to pay for it, and may not be as concerned as an IT shop about costs, so they're working off a different model.

  • 1
    Good point about IT vs Software contract jobs. I've noticed that as well, IT consultant are hired to do the dirty maintenance work, whereas software consultants are mostly employed for a specific skillset.
    – tunafish24
    Jun 15, 2012 at 20:49
  • 1
    True, it's pretty rare for a software company to hire contractors, other than contract-to-hire to give someone a test drive. Usually contractor jobs are maintaining an old CRUD app while perm employees work on the new exciting stuff or you end up being the extra manpower being thrown into a failing project. Occasionally, you'll get new work but this is relatively rare.
    – jfrankcarr
    Jun 17, 2012 at 21:47

Others have already added plenty of information about this. But, I think they missed one point. Sometimes, contractors can earn far less than their potential because of the practice of sub contracting, i.e getting a job through a middle man or vendor. In fact, I had recently created a question about this. Often, the jobs offered by these types of contracting/staffing agencies are of the maintenance or "labor intensive" type i.e not much thinking, designing and problem solving.

Here is an example:

Company = + $100/hr
vendor1 = - $16/hr (preferred vendor)
vendor2 = - $8/hr  (middle vendor)
vendor3 = - $8/hr  (middle vendor)
contractor = 100 - (16+8+8) = $68/hr

68 $/hr or 140,000 p.a might be quite good for those living in most big cities if you are single or are married without kids. But think about the extra money every one could make/save by removing middle vendors !

Most importantly, your rate depends on how skilled you are. Assume that there is a strong demand for your skills in the market. Then, the rate you get primarily depends on your skills and secondarily depends on your visa status. If you are really skilled, then you can easily negotiate for a higher rate. Unfortunately, if you are on a short term work visa or need one, then don't be surprised if you get low ball offers. Highly skilled people might not face this problem often, but average skilled ones will. Unfortunately, visa status is used as a bargaining chip by many companies.

Takeaway: Try to find companies that work directly with clients, i.e don't have middle vendors.


Title: Senior Software engineer Experience: 8 years Salaried offer: $125K+ benefits

This salary should translate to about $85/hour as a contractor.

I don't understand your math... 85$ per hour * 48 weeks (4 weeks vacation) =163K, say you have excellent benefits valued @ 15k (excluding vacation) you are now at 148K

Much better then 125k (Almost 20% more) ... Even if you are 1099 and need to pay an additional 7% in taxes...

+ Paid overtime!

  • What I meant by translate was that after about a 30% increment, it should be $85/hr. That's what I've heard, account 20-30% for benefits.
    – tunafish24
    Jun 19, 2012 at 6:48
  • 2
    You're missing a very important factor. You don't always get to bill 8 hours a day, 5 days a week when working as a contractor. That will significantly reduce your 163K figure. May 8, 2013 at 10:09
  • 4
    And sometimes as a contractor you get to bill for more than 8 hours a day 5 days a week. I once worked on a project where they brought in a contractor to fill a slot they couldn't fill otherwise. He billed us 40+ hours per week and had another project going as well. He made more money in the 3 to 4 months we worked together than I did in a year at that time.
    – GreenMatt
    May 28, 2013 at 7:46
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    Actually, $85/hour for a consultant equivalent of $125k/year is cheap...the consultant has to pay for the following things (that an employer typically pays for) : health insurance, other benefits (like bonuses and 401k matching), lack of work as others already mentioned, rent, computers and other equipment, etc. The actual rate a consultant needs to charge is typically in the 2-300% or the nominal salary, i.e. for the $125k normal salary a consultant should be charging $120-$180 an hour, at least...the $125k as an employee is a better deal than $85/hour as a consultant!
    – daaxix
    Oct 28, 2013 at 19:17

It used to be (especially in the 80s) that if you were a consultant (ie, a true freelancer) you could take home more money than salaried software professionals. Even now, in some cases, if you work in a 1099 basis, you can make 20-30% more...but you don't actually make more, because 1099 workers have to pay their portion of social security insurance, AND the portion that a W-2 worker's employer would normally pay.

  • 1
    And health benefits! And disability insurance! And unemployment taxes! And retirement! And G & A (computers, desks, office space, etc.)!
    – daaxix
    Aug 5, 2014 at 20:45

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