Hourly Rate

Turning a salary into a contractor rate

Dividing a salary by 2,080 hours gives the wrong number for contracting, and it is wrong by a large factor. A contractor carries costs an employee never sees, and bills far fewer hours than they work.

How it works

• Converts an annual salary into an equivalent hourly figure on the standard 2,080-hour year.
• Applies an overhead multiplier for the benefits, taxes and paid leave an employer would otherwise cover.
• Divides by billable rather than worked hours, since not every working hour is chargeable.

employee equivalent  = salary ÷ 2,080
contractor rate      = salary × overhead ÷ billable hours

overhead 1.25–1.50 covers:
  employer social contributions, paid leave, sick pay,
  pension, health cover, equipment, accounting, insurance

billable hours ≈ 1,600–1,800 (75–85% utilisation)

Worked example

Matching a 90,000 salaried package as an independent contractor.

1. naive: 90,000 ÷ 2,080 = 43.27 an hour
2. loaded cost at 1.35 overhead = 121,500
3. realistic billable hours = 1,700 (82% utilisation)
4. rate = 121,500 ÷ 1,700 = 71.47 an hour

About 71 an hour, not 43. Billing the naive figure would leave you roughly 40% short of the package you left — the gap that catches most first-time contractors.

Reading the result

• Utilisation is the number people forget. Sales calls, admin, invoicing, training and gaps between contracts are all unpaid. Even busy contractors rarely bill above 85% of working hours, and 75% is normal in the first year.
• The overhead multiplier is not padding. It covers employer social contributions, the paid leave and sick pay you no longer get, pension you now fund yourself, equipment, insurance and an accountant. 1.25 is lean; 1.5 is realistic in high-contribution jurisdictions.
• Contracting carries risk that deserves a premium beyond cost recovery. No notice period, no redundancy protection, and payment terms that can stretch to sixty days. Matching your old package exactly means taking on the risk for free.
• Day rates are quoted more often than hourly in many markets. Multiply by 8, but check whether the client expects 7.5 or 8 hours for a day — that difference is 6% of your income.

Common questions

Why can't I just divide my salary by 2,080?

Because 2,080 is hours worked, not hours billed, and your salary was only part of what your employer spent on you. Both errors push the same way: the naive figure came out at 43.27 above, against a realistic 71.47.

What utilisation rate should I assume?

75% starting out, 80–85% once established. That is 1,560 to 1,770 billable hours. Assuming full utilisation is the single most common reason contractors find themselves earning less than they did employed.