Someone at a barbecue tells you they've gone contracting and they're on $60 an hour. You're on $80,000 a year, you do the sum in your head, and you work out you're on about $38. Suddenly your sausage doesn't taste as good.
Hold on though, because that comparison is doing you a disservice in both directions. Your $38 is worth more than $38. And their $60 is worth less than $60. Whether contracting actually pays better depends on numbers neither of you did at the barbecue.
The sum everyone does, and why it's wrong
Take the salary, divide by 2,080 hours, done. $80,000 becomes $38.46 an hour, so anything above that is a pay rise.
It isn't, for two reasons that both work against you.
You don't actually work 260 days a year
There are about 260 working days in a year. As an employee you get paid for all of them. But you only turn up for some of them.
Knock off four weeks annual leave. That's 20 days. Knock off the 12 public holidays. Knock off the 10 days of sick leave you're entitled to, whether or not you use them. You're down to 218 days that you're actually at work.
Your employer pays you for 260 and gets 218. As a contractor you only invoice for the days you work. Same money, 16% fewer days to earn it in.
That one alone means your $38.46 needs to be about $46 before you've added anything else.
The stuff your employer was quietly paying
Have a look at your payslip. Now look at the bits that never made it onto your payslip.
KiwiSaver. Your employer chips in on top of your salary. Currently 3.5%, going to 4% in 2028. On $80,000 that's $2,800 a year you'd have to fund yourself.
ACC. Everyone pays the earner's levy. But there's a second one, the work levy, and as an employee your employer pays it. Go contracting and you pay both. How much depends on what you do for a living, and the difference between an office job and a roofing job is substantial.
All the admin. GST returns, invoicing, chasing invoices, an accountant, insurance, and the evening you'll spend looking for a receipt from March. None of it is billable. All of it is real.
And the one nobody can price
You also lose the thing that doesn't show up anywhere. As an employee, if work goes quiet, you still get paid. As a contractor, if work goes quiet, you go quiet.
Notice period, redundancy, the general sense that next month is sorted. That's worth something, and it's worth different amounts to different people. Someone with a mortgage and two kids values it rather more than a 24-year-old flatting with three mates.
There's no correct number. But it should be a number greater than zero, and most people set it at zero by never thinking about it.
Putting it together
Back to the $80,000 job.
Add the employer KiwiSaver and you need $82,800. Add a modest allowance for ACC and an accountant, say another $2,500, and you're at $85,300. Divide that by 218 billable days and you get $391 a day, or about $49 an hour.
So your $38.46 was really $49. And your mate's $60 is a genuine step up, but it's a 22% step up, not the 56% it looked like over the sausages.
That's before any premium for the risk you've just taken on.
What about the other direction?
It happens less often, but it happens. A contractor gets offered a permanent role and needs to know what salary is equivalent to the rate they're on now.
The maths runs the same way in reverse, with one difference worth knowing: most contractors don't take four weeks off. They take less, because holidays aren't paid and there's always one more week of work available. So if you're comparing your contractor life to a salaried job, use the days you actually take, not the days you're theoretically entitled to. Otherwise you'll flatter the contracting side and wonder why the salary offer feels insulting.
the calculator
I built a calculator because doing this properly on paper is tedious and doing it in your head is how people end up undercharging for three years.
It works both ways. Tell it your salary and it gives you the hourly and day rate you'd need to match it. Tell it your contracting rate and it gives you the salary equivalent. It breaks the answer down line by line, so you can see exactly how much of your rate is just replacing annual leave, and it lets you set your own risk premium rather than pretending there's a right answer.
Contractor vs employee calculator →
Change the numbers. Try it with the leave you actually take rather than the leave you're owed. Try it with a fortnight between contracts, because that happens.
Then go and quote a rate you won't resent in six months.
If you'd like a second opinion on whether contracting stacks up for your situation, including the bits a spreadsheet can't model, get in touch for a free 30 minute chat. Independent and commission-free.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here.