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Employee vs. Subcontractor Cost Calculator

Compare the true loaded cost of a W-2 employee against a 1099 subcontractor at your actual utilization.

W-2 employee cost
$/hr
38%

Taxes, workers' comp, liability, benefits.

hrs
62%
$/yr
$/yr
1099 subcontractor cost
$/hr
12%

Coordination, warranty backstop, payment risk.

hrs/wk

Scheduling, QC, customer communication for the sub.

$/hr

What your management time costs the business.

Subcontractor is cheaper

$345annual savings with subcontractor

At 1,290 billable hours: employee $66.74/hr vs. sub $66.48/hr.
Employee annual cost$66.74/billable hr
$86,071
Subcontractor annual cost$66.48/billable hr
$85,726
Billable hours62% of 2,080 paid hours
1,290 hrs
Break-even sub rateSub rate where costs match employee
$55.24/hr
Cost comparison
Cost componentEmployeeSubcontractor
Labor$80,371$79,439
Equipment & training$5,700—
Coordination (your time)—$6,287
Per billable hour$66.74/hr$66.48/hr
Annual total$86,071$85,726

Classification risk is not in this math

A 1099 who works exclusively for you, uses your tools, and follows your schedule is likely a misclassified employee. IRS penalties include back taxes, interest, and workers' comp liability. The cost comparison assumes a legitimate independent subcontractor relationship.

Steady volume favors employees

Above 1,200 billable hours, employee cost per productive hour typically beats subcontractor rates. You also gain scheduling control, customer relationship, and warranty accountability.

What this assumes

  • Employee cost includes burdened wage on all paid hours, not just billable hours.
  • Subcontractor cost includes your coordination time at your loaded owner rate.
  • Does not model misclassification risk — a 1099 who works exclusively for you may legally be an employee.

Important

Misclassifying employees as 1099 subcontractors carries IRS penalties, back taxes, and workers' comp liability. Control, exclusivity, and who supplies tools determine classification — not what you call the arrangement.

Understanding the result

The hourly rate is not the cost

A $28/hour employee costs $38 to $42/hour burdened. On 2,080 paid hours at 60% utilization, that is $131,000 a year for 1,248 billable hours — $105 per billable hour before equipment, training, or your management time.

Subcontractors cost more per hour but less risk

A sub at $55/hour bills only for hours on the job — no utilization gap, no workers' comp on idle time, no unemployment. But you pay a premium, lose control, and carry warranty backstop risk on their work.

Volume determines the answer

Below 800 billable hours a year, a sub is almost always cheaper. Above 1,400 billable hours with steady work, an employee wins on cost and control. The crossover depends on your burden rate and how much coordination a sub requires.

Common questions

Is it cheaper to hire an employee or use a subcontractor?
Subcontractors cost more per billable hour but zero when work is slow. Employees cost less per productive hour above 1,200 billable hours/year but you pay for every hour they are on the clock. Calculate at your actual utilization, not the sub's hourly rate alone.
What is the true cost of a $25/hour employee?
Add 30 to 45% payroll burden (taxes, workers' comp, liability, benefits), plus $3,000 to $8,000/year in tools, uniform, and vehicle allocation. A $25/hour employee typically costs $38 to $48/hour fully loaded before overhead.
When should a contractor use subcontractors?
Use subs for overflow, specialized work outside your license, or when volume is below one full-time tech. A plumber who needs help on two jobs a month pays less per job with a sub than carrying a W-2 at 40% utilization.
What is employee misclassification?
Treating someone as a 1099 when they are legally an employee. IRS factors: behavioral control, financial control, and relationship type. A tech who works only for you, uses your truck, and follows your schedule is likely an employee regardless of the label.
How much should I mark up subcontractor work?
Mark up sub invoices 10 to 20% to cover coordination, warranty backstop, payment risk, and customer relationship. A $5,000 sub invoice at 15% markup adds $750 — less than the cost of managing a W-2 employee at low utilization.

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