How the break-even rate is worked out
The calculator adds up what the salaried job is really worth and what you would have to cover yourself as a contractor, then spreads it over the hours you can actually bill:
break-even rate = (salary + retirement match + benefits + extra payroll tax + business costs) ÷ billable hours
Billable hours are 52 weeks, minus the weeks of paid time off you would lose, times your hours per week and utilization.
Time off assumes a five-day working week. The tax allowance is a simple budget item; actual tax depends on your net earnings and local rules. See the IRS guide to US self-employment tax for how it is calculated.
Why contract rates look high
- No paid time off. Every vacation day and public holiday is unbilled.
- Gaps between contracts. Finding the next client takes time, which is why utilization is usually below 100%.
- Benefits and taxes. Health cover, retirement saving and the employer half of payroll tax become your costs.
The break-even rate covers the costs entered here. Add a margin for profit and risks you have not priced into those costs.