What counts as 'on-costs' for an employee?

Employer payroll taxes, social security or pension contributions, mandatory health insurance, paid leave, public holidays, sick days, equipment, training, software licences, and a fair share of office and management overhead.

Should I include my own time managing the freelancer?

Yes — both freelancers and employees require management time. The difference is usually small for skilled freelancers and can be larger for new employees during ramp-up.

Guide

Freelancer vs employee cost basics

An employee at $30/hour and a freelancer at $60/hour are not what they seem. Once you add taxes, benefits, paid leave, equipment, and downtime, the employee can easily be more expensive than the freelancer for the same hours of output. Or much cheaper, depending on utilization. This guide gives you a fair way to compare.

Hiring Costs 7 min readUpdated Sep 22, 2025

SMBHelper editorial teamLast updated Sep 22, 2025Reviewed for clarityEditorial standards

Why hourly rate is the wrong starting point

An employee's hourly rate is just the wage. Their cost to the business is the wage plus on-costs: payroll taxes, mandatory benefits, paid leave, sick days, training, equipment, software licences, and a share of overhead. On-costs typically add 25–45 percent to base salary depending on jurisdiction.

A freelancer's hourly rate already includes all of those things. They charge more per hour because they are absorbing what an employer would otherwise pay separately.

The fair comparison: cost per productive hour

To compare honestly, calculate cost per productive hour for both. For an employee, that is annual fully loaded cost divided by annual productive hours (working hours minus leave, sick days, and ramp-up time). For a freelancer, it is the hourly rate, period.

A typical full-time employee delivers around 1,600–1,800 productive hours per year, not the 2,080 implied by a 40-hour week.

When freelancers win

Freelancers usually win for irregular workloads, specialist skills you do not need full-time, short-term projects, and roles where you cannot guarantee enough work to fill an employee's hours.

When employees win

Employees usually win for stable, high-utilization roles, work that requires deep institutional knowledge, roles needing presence and continuity (customer success, operations), and any role where the business benefits from the employee getting better at the job over years.

Hybrid is usually the answer

Most SMBs end up with a small permanent core team and a rotating set of freelancers for specialist or peak work. The mix changes as the business grows. Recalculate every year.

Frequently asked questions

What counts as 'on-costs' for an employee?: Employer payroll taxes, social security or pension contributions, mandatory health insurance, paid leave, public holidays, sick days, equipment, training, software licences, and a fair share of office and management overhead.
Should I include my own time managing the freelancer?: Yes — both freelancers and employees require management time. The difference is usually small for skilled freelancers and can be larger for new employees during ramp-up.

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