Permanent vs. Contract: What 5 Years Really Costs
At first glance, contractors look expensive — their annual billing rates often run 30-50% higher than equivalent full-time salaries. But full-time employees come with employer payroll taxes, benefits, PTO, and long-term retention overhead that add up fast.
This calculator builds a 5-year total cost picture for both options. It applies employer FICA (7.65%) and annual benefits costs to permanent employees, and adds contract renewal costs (agency fees, onboarding) to contractors. Contract workers are treated as 1099/independent, so no payroll taxes are included on that side.
The crossover point — where permanent employment becomes cheaper than contracting — typically happens within 12-18 months. After that, the permanent employee's deeper product knowledge and lower turnover rate provide compounding returns that don't appear in this direct cost comparison.
For short-term or highly specialized needs, contracting almost always wins. For roles that are core to your business and need continuity, permanent often does.
Frequently Asked Questions
If you need someone for under 6 months, or if the role is highly specialized (and you'd need to pay a premium for full-time equivalent), contracting is almost certainly cheaper. Also cheaper when the role doesn't require institutional knowledge that persists beyond the contract.
Using the same contractor for years can trigger IRS reclassification as an employee, creating back-tax liability. Many companies use staffing agencies to manage this risk. Long-term contractors should ideally be reclassified as employees after 12-24 months of ongoing engagement.