Why Do Independent Contractors Cost So Much?

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So you decided to hire an independent contractor instead of a new employee to handle certain tasks, and now you’re experiencing a bit of sticker shock. Why should you pay $80 an hour for a freelance PR consultant when you’d only pay her $35 an hour as a salaried staff member? Is she gouging you? No, she’s not.

Independent contractors incur a range of small-business expenses, much like your company, so it’s unfair to compare their rates with the wages of an in-house employee.

Here’s what goes into a consultant’s hourly rate.

Equipment and Office Expenses

Independent contractors are responsible for purchasing and maintaining their equipment, which may include big-ticket items such as computers and software. In many cases, a consultant also rents office space. All of these capital and operating expenses are factored into the contractor’s hourly rate.

Training Time and Expenses

Most professional consultants need to spend a portion of their time reading industry news and books, going to seminars and taking training courses related to new laws or technologies. All of this time is technically unpaid, so consultants must factor these hours, as well as the associated costs of the seminars and educational materials, into their rates.

Extra Taxes

You are required to pay a federal payroll tax of 6.2% on any employee’s salary, which goes towards Social Security and Medicare contributions. An independent contractor must pay this amount out-of-pocket as a self-employment tax.

Marketing Expenses

Consultants pay for marketing materials, such as business cards, websites, and online and print advertisements. They also spend time on business-development activities. These hours are unpaid, so they often charge a higher hourly rate to compensate for lost billable time.

Insurance

Contractors purchase their own health insurance and may also need several types of business and liability, life and disability insurance.

Retirement Savings

Independent contractors don’t have employer-sponsored 401(k)s, so instead, they must finance their own retirement savings plans (if they plan for retirement at all).

Sick Leave and Vacation Time

Although employees are paid for a certain amount of sick leave and vacation time every year, independent contractors are only paid for the hours that they bill to clients. Generally, they’ll charge an hourly rate that allows them to observe public holidays and take vacations each year.

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Professional Services

Most business owners—even sole proprietors—need to make use of professional services such as lawyers, accountants and bookkeepers. These costs often add up to $1,000 or more each year.

One of the biggest differences between an employee and a contractor is that an employee knows he’ll make a certain amount of money each year no matter what, as long as he shows up for work. A consultant doesn’t: She needs to focus on marketing, staying up-to-date in her industry, managing the business’s finances and operations, and completing the jobs that she’s been paid to do. She may need to work three un-billable hours on her own business for every hour that she bills to a client. So, even if a contractor’s fee seems steep, chances are, you’re getting good value for your money.

While the hourly rate of a contractor may seem expensive, when you compare the entire costs of hiring a full-time staff member, furnishing their workspace and equipment, managing their taxes and offering benefits, the contractor is actually the less-expensive of the two. For help with hiring a contractor, check out our article on protecting your business when hiring contractors. If you’ve hired contractors in the past year and need help with taxes, see our guide to 1099s for small businesses.