FTE vs Contractor: The Real Cost of a $90k Hire

Solo founders making their first hire usually frame it as a salary-versus-rate comparison. That comparison mixes units: a salary buys a year of employment including holidays and leave, while a contractor's rate buys hours worked. The useful comparison is loaded cost per working hour, plus the risks each structure carries.

This is the cost-math part of the hire-or-contract series. If you want the decision frame first, start with how to decide: hire or contract; the legal side is in contractor vs employee, honestly.

The headline-rate trap

A founder weighing a $90,000 salary against a contractor at $60 an hour for 2,000 hours ($120,000) sees a $30,000 gap and assumes the employee is cheaper. The salary leaves out what the employer pays on top of it. In the BLS's June 2026 Employer Costs for Employee Compensation release, private-industry employers paid $46.89 an hour worked in total compensation, of which $32.82 was wages and salaries^[1]. Because a salary already pays for vacation and holidays, the markup on a salary is lower than that 1.43 ratio: 1.24x to 1.29x, a derivation set out in the true loaded cost of an employee.

Loaded cost of an FTE

The components for a $90,000 salaried hire in 2026. Lines marked as assumptions depend on your state, insurer and setup; replace them with your own quotes.

Component	Annual cost	Basis
Base salary	$90,000
Employer social security and Medicare	$6,885	7.65% (6.2% to the $184,500 wage base, plus 1.45%)[2]
Federal unemployment (FUTA)	$42	0.6% of the first $7,000 after the full state credit[2]
State unemployment	$300	Assumption: rates and wage bases vary by state and experience
Workers' compensation	$300	Assumption: office work, priced by your insurer
Health insurance, single coverage	$7,885	2025 average premium $9,325 less the $1,440 average worker contribution[3]
Retirement match	$2,700	SIMPLE IRA match of up to 3% of pay[4]
Equipment and software	$2,500	Assumption: laptop amortized plus seats
Payroll service	$600	Assumption
Total	$111,212	1.24x salary

Paid vacation and holidays are not an extra line: the salary already pays for them. They show up instead as fewer working hours, which is where the per-hour comparison below accounts for them. The contractor vs employee calculator runs the same build with your own state and benefits.

Loaded cost of a contractor

The contractor stack is short: the invoices, plus small items such as any software seats you provide and the Form 1099-NEC you file each year. You pay no employer payroll tax, benefits or leave. For $60 an hour over 2,000 billed hours the annual cost is $120,000 plus those small items.

Two things that are not on the invoice still belong in the decision. Onboarding time is real for both structures and depends on the work, not the contract. And a contractor billing 2,000 hours a year for one client is working a full-time schedule, which is exactly the pattern the classification tests look at (below).

Cost per working hour

A full-time year is 2,080 scheduled hours. With two weeks of vacation (80 hours) and 11 holidays (88 hours), the employee works 1,912 hours, so $111,212 ÷ 1,912 = $58.17 per working hour against the contractor's $60. On cost alone the two are within about 3% of each other.

Ramp time moves that. Suppose a new employee works at half speed for the first three months, an assumption to replace with your own: year one then delivers the equivalent of 1,673 full-speed hours, and the employee's effective cost rises to $66.47 per hour. If the contractor already knows the problem and starts at full speed, the contractor is cheaper in year one. In year two the ramp is gone and the employee is back to $58 an hour, while knowledge of your product and customers keeps accumulating inside the company.

That is the structure of the decision: on work that lasts beyond the first year and sits at the core of the product, the employee's lower steady-state cost and accumulated context usually win; on bounded projects, the contractor's faster start and lack of fixed commitment usually win. The numbers above tell you how close the call is; the time horizon decides it.

What moves the comparison

• Health coverage tier. Family coverage costs the employer $20,143 at the 2025 averages ($26,993 premium less the $6,850 worker contribution), $12,258 more than single coverage^[3]. That alone moves the employee's cost to about $65 per working hour.
• State taxes and insurance. State unemployment rates and wage bases differ widely, and so do workers' compensation rates. Get the actual numbers for your state before deciding on a close call.
• Equity. Options are not free: a 0.5% grant at a $5M valuation is $25,000 of paper value given up by existing shareholders. It lowers cash cost while raising total cost.
• Hours actually needed. If the work needs 1,200 hours a year, a full-time employee is paid for capacity you do not use, and a contractor or part-time hire wins on cost. The hire-or-contract guide works that case through.

Pricing classification risk

Whether someone is a contractor is decided by how the work is done, not by the contract. The IRS looks at behavioral control, financial control and the type of relationship^[6], and the Department of Labor applies its own economic-reality test for wage-and-hour law^[7]. A contractor working full-time hours for one client, on your tools and your schedule, for an open-ended period, fits the employee pattern.

The federal tax exposure is computable. When a worker is reclassified and the error was not intentional disregard, section 3509 sets the employer's liability for the taxes it should have withheld at 1.5% of wages for income tax and 20% of the employee's share of social security and Medicare, rising to 3% and 40% if the employer also failed to file the information returns^[5]. The employer's own 7.65% share is owed in full. On $120,000 of payments that is $9,180 + $1,800 + $1,836 = about $12,800 for one year, or about $16,500 with the higher rates, before federal and state unemployment tax, interest, penalties and any back wages or benefits claims under labor law.

So the classification question is not a reserve line to add to the contractor column. If the work pattern looks like employment, the cost comparison is moot and the hire should be an employee. The full IRS and DOL tests are in contractor vs employee, honestly.

Common hiring-cost mistakes

• Comparing salary to invoice rate as if they were the same unit. Compare loaded cost per working hour on both sides.
• Adding paid leave as a cost on top of salary. The salary already pays for it; count it as fewer working hours instead.
• Skipping the ramp. A new hire's first months cost full salary for partial output. Price year one with an explicit ramp assumption.
• Misclassifying to save payroll tax. The employer share of payroll tax on $120,000 is $9,180 a year; the section 3509 bill on reclassification is larger, before labor-law claims.
• Deciding on year one alone. Year one favours whoever starts fastest; year two favours whoever accumulates context. Run both years before deciding.

The right structure follows from the work pattern, the time horizon and the budget for variance. Run both columns in the contractor vs employee calculator, plan the team cost with the team salary budget calculator, and run year two as well as year one.

Related in this series

• How to decide: hire or contract: the decision frame (classification, loaded cost, scope stability) and the order to run them in.
• Contractor vs employee, honestly (2026): the IRS and DOL tests, flexibility versus continuity, and when the right answer is not the cheapest one.