Salaries versus Freelance Rates

July 9, 2007 3:51 pm sharleeplett Website Design, Website Development

We are sometimes asked why contracting rates are higher than salaried employees.

The answer is that they just seem to be higher.

To make a real comparison, you can’t just take a salaried employees annual gross salary and divide it by the number of working hours in a year to compare it to freelance rates.  You first have to adjust the hourly rate of the salary to allow for the differences between an employee and a freelancer.

Adjusting Salaries for Additional Employee Costs:

The annual gross wages are just the base salary for an employee.  Added to this is the employer contributions for FICA and other employer contributed taxes and insurance.  You also need to figure in the costs of supplying the work space, equipment and supplies plus the management and administrative costs associated with having employees.  You can figure this at around 30%.

Adjusting Salaries for Actual Working Hours:

The number of working hours in a year is 2,080.  This is figured at 40 hours per week, 52 weeks per year.  The assumption is that the employee is working on their actual job tasks from the moment they hit the door to the moment they leave the office.  This is simply not the case.

You have to first deduct the hours for paid legal holidays, sick days and vacations. 

7 legal holidays per year
2 weeks vacation time
5 sick days

Total:  176 hours

Now you have to figure the time for lunch, breaks and good morning chit chat.  That’s at least one hour per day.  With the remaining 48 working weeks per year, that comes to 240 hours per year.

It is unreasonable to expect the employee to work all eight hours a day without doing some kind of administrative tasks.  Let’s figure at least an hour a day for answering mail, telephones, and so on.  That’s another 240 hours off the working hours per year.

With employees in the Internet technology skills area, there is inevitable downtime for researching new developments, learning new software, installations, and so on.  Figure at least a half hour per day for this over a year.  That’s another 120 hours off the working hours per year.

So really, it’s not 2,080 hours per year. 

It’s 1,304 hours per year.

The Formula for Comparison:

Take the gross annual salary and multiply it by 1.3.
Divide that figure by 1,304 hours.

That’s what that employee actually costs per hour.

Example of Salary Adjustment for Comparisons:

Let’s take a Senior Web Designer, using the job description and salary figures from Salary.com. 

Job Description: Designs and constructs web pages/sites including incorporating graphic user interface (GUI) features and other techniques. Maintains and provides ongoing design of the website, promos and ad banners, seasonal content specials and custom chat launcher design for partners. May require a bachelor’s degree in a related area and 4-6 years of experience in the field or in a related area. Familiar with a variety of the field’s concepts, practices, and procedures. Relies on experience and judgment to plan and accomplish goals. Performs a variety of complicated tasks. May lead and direct the work of others. Typically reports to a project leader or manager. A wide degree of creativity and latitude is expected. 

Median Salary for Greater Los Angeles:      $98,000
Additional Employer Costs 30%                  29,400

Adjusted Annual Salary:                           $127,400

Divided by 1,304 hours:     $98.00 per hour

Comparing Freelancers to Employees:

When you are trying to compare employees to freelancers, you always have to keep in mind that the freelancer only bills you for task related work.  You are not billed for chit chat time, coffee breaks and holidays.  You do not have to purchase or maintain their equipment or software or cover their overhead.  They pay for their own education and they do not bill you for that time.  You don’t include them in your insurance plans and you make no employer contributions. 

Most importantly, you do not have to make a committment to keep supplying a freelancer with work.  You also do not have to personally manage their activities or hire another employee to manage them.  Their work is done without supervision.  When the work is complete, they make up their bill and you pay it.  Fast, clean and simple.  You have no further obligations.

Hiring freelancers is ideal for any company that does not have ongoing design and development work.  But you will have to pay the freelancer a rate that is comparable to a salaried employee if you want the same level of quality or better.