Contractor vs. FTE: Total cost of ownership

TL;DR

The all-in cost of a full-time US-based software engineer is typically 1.25–1.45x their base salary when you add employer payroll tax, benefits, equipment, and management overhead. A contractor's all-in cost is closer to 1.1–1.2x the quoted hourly rate when you account for platform fees. The breakeven point where FTE becomes more cost-efficient than a contractor depends on engagement length, utilization, and recruiting cost. For most roles, the breakeven is around twelve to eighteen months of sustained full-time engagement.

Key takeaways

• The contractor vs. FTE cost comparison runs on all-in contractor cost versus all-in FTE cost, not on hourly rate versus base salary. Both numbers require explicit calculation.
• For engagements under twelve months, contractors are almost always less expensive on a total cost basis, even when the hourly rate looks high.
• The hidden costs that favor contractors: no recruiting fee, no onboarding overhead, no severance, no benefits administration, no equity dilution.
• The hidden costs that favor FTEs: no platform fee or agency margin, deeper institutional knowledge over time, lower ongoing coordination cost as tenure grows.
• Conversion fees, charged by talent platforms if you hire a contractor directly as an FTE, are a material cost that should be factored into the initial engagement decision.

The full-time employee total cost model

Most hiring leaders compare contractor hourly rates to FTE base salary. This misses approximately 25–45% of the FTE's actual cost to the company.

Mandatory employer costs

Employer payroll taxes (US):

• FICA (Social Security + Medicare): 7.65% of wages up to $184,500 (2026 Social Security wage base), then 1.45% above
• FUTA (federal unemployment): 0.6% on first $7,000 of wages
• State unemployment tax: 1–4% depending on state and company history
• Estimated total payroll tax: 9–12% of base salary

Benefits (employer contribution):

• Health insurance (employer share): $6,000–$12,000/employee/yr for individual coverage, $15,000–$25,000 for family
• 401(k) employer match: 3–6% of salary at typical match rates
• Dental and vision: $500–$1,500/yr
• Life and disability: $500–$1,000/yr
• Estimated total benefits: $12,000–$28,000/yr depending on plan generosity

Overhead and operational costs

Equipment and software:

• Laptop and peripherals: $1,500–$3,000 (amortized over three years: $500–$1,000/yr)
• Software licenses (IDE, collaboration tools, SaaS access): $1,000–$3,000/yr
• Estimated: $1,500–$4,000/yr

Recruiting and onboarding:

• Internal recruiter time or external agency fee: $15,000–$40,000 per hire (agency typically 15–25% of first-year salary)
• Interview time across the team: 20–40 engineer-hours at $100–$150/hr effective cost
• Onboarding and ramp to productivity: two to three months at 50% effectiveness
• One-time cost per hire: $20,000–$55,000 (amortized over tenure)

Management overhead:

• Engineering manager time (performance reviews, 1:1s, career development): 15–25% of manager salary allocated per report
• HR and people operations: $2,000–$5,000/yr per employee
• Estimated: $10,000–$20,000/yr

Total FTE cost summary

For a senior engineer at $150,000 base salary:

Base salary: $150,000

Employer payroll tax (10%): $15,000

Benefits (mid-range): $20,000

Equipment and software: $2,500

Management overhead: $15,000

Total annual cost: $202,500

Effective hourly rate (2,080 hrs): $97/hr

Recruiting and onboarding add $20,000–$55,000 in year one, pushing year-one total cost to $222,500–$257,500, or $107–$124/hr effective for year one.

Most hiring leaders compare contractor hourly rates to FTE base salary. That comparison misses about a third of the FTE's actual cost.

The contractor total cost model

Contractor cost calculation is simpler, but the platform fee layer adds complexity.

Contractor direct costs

Quoted hourly rate: The rate the contractor charges per hour. This is the floor.

Platform service fee: The fee charged by the talent platform on top of the contractor's rate. Ranges from 5–15% on transparent platforms to 35–55% embedded margin on platforms where the developer's take-home is not separately disclosed.

Trial period cost: Some trial periods are paid. Budget 2–3 weeks of contractor time as a potential trial cost if the first match doesn't work.

Conversion fee (if applicable): If you decide to hire the contractor as an FTE, most talent platforms charge a conversion fee. This typically ranges from a percentage of projected annual earnings to a flat fee in the tens of thousands. For a $150,000 salary, conversion fees commonly land between $10,000 and $50,000.

Contractor cost summary

For a senior engineer at $140/hr, 40 hours/week, 50 weeks/year (not accounting for holidays or gaps):

Contractor hourly rate (2,000 hrs): $280,000

Platform service fee (10%): $28,000

Total annual cost: $308,000

Effective hourly rate: $154/hr

At full-time, full-year utilization, the senior contractor is meaningfully more expensive than the FTE. The comparison shifts at lower utilization.

The breakeven analysis

The contractor vs. FTE cost comparison depends on three variables: utilization rate, engagement length, and whether the role will convert to FTE.

At 50% utilization (20 hours/week)

Contractor at $140/hr, 20 hours/week, 50 weeks: $140,000/yr in contractor fees + 10% platform fee = $154,000.

FTE at $150,000 base + overhead: $202,500/yr, regardless of utilization.

At 50% utilization, the contractor is clearly more cost-efficient. The FTE's overhead is fixed; the contractor's cost scales with actual work.

At 80% utilization (32 hours/week)

Contractor: $140/hr × 1,600 hrs + 10% platform fee = $246,400.

FTE: $202,500, plus year-one recruiting cost of $20,000–$55,000.

At 80% utilization in year one, the contractor and FTE are comparable in total cost. In year two without recruiting cost, the FTE becomes less expensive.

At full utilization (40 hours/week, 50 weeks)

Contractor: $308,000/yr (as above).

FTE: $202,500/yr in year two and beyond.

At full utilization over multiple years, the FTE is significantly less expensive. The crossover to FTE cost advantage typically happens at twelve to eighteen months of sustained full-time engagement.

Picking the right model on cost grounds

Use a contractor when

• Engagement is under twelve months with defined scope
• Skill set is project-specific, not part of the long-term stack
• Seed or Series A budget can't absorb fixed FTE overhead
• Role requires immediate start without a 2–3 month recruiting cycle
• Uncertain whether the role is permanent or time-bounded

Use an FTE when

• Role is a permanent function with multi-year scope
• Team is large enough that institutional knowledge compounds
• Function requires consistent cultural presence and management depth
• Skill set is part of your core technical identity
• Past Series B with budget certainty for fixed headcount

Hidden costs that aren't in either calculation

Contractor advantages (costs that FTE carries but contractor doesn't):

• Severance: zero for a contractor engagement that ends; two to six weeks of salary plus benefits for an FTE layoff
• Benefits administration overhead: HR time, compliance, broker management
• Equity and equity management: cap table complexity, 409A valuations, option pool dilution
• Long-term performance management: the cost of a bad FTE hire is higher because exit is slower

FTE advantages (costs that contractor carries but FTE doesn't):

• Institutional knowledge loss at engagement end: the FTE compounds knowledge over time; the contractor takes knowledge with them
• Coordination cost: a long-tenure FTE knows the codebase and the team; a new contractor has a ramp period
• Platform fees: no ongoing platform fee on an FTE, the recurring cost is the salary and benefits, not a fee layer

When each model wins

Use a contractor when:

• The engagement is under twelve months with defined scope
• You need a skill set for a specific project that isn't part of your long-term stack
• You're a seed or Series A company that can't absorb fixed FTE overhead
• The role requires immediate start without a two to three month recruiting cycle
• You're uncertain whether the role is a permanent function or a time-bounded project

Use an FTE when:

• The role is a permanent function with multi-year scope
• The team is large enough that deep institutional knowledge is a material productivity driver
• You're building a function that requires consistent cultural presence and management depth
• The skill set is part of your core technical identity, not a project-specific need
• You're past Series B with the budget certainty to absorb fixed headcount cost

The structural framing for this decision (FTE vs. contractor vs. team augmentation as three different products) lives in FTE vs. contractor vs. team augmentation. When the engagement starts to span multiple ICs, the relevant cost comparison shifts to individual contractors vs. managed teams.

People also ask

Is a contractor always more expensive than a full-time employee? At full utilization over multiple years, a contractor is typically more expensive than a full-time employee when you compare all-in costs, the contractor's hourly rate plus platform fees exceeds the FTE's salary plus overhead at sustained full-time engagement. The crossover point is usually twelve to eighteen months. For shorter engagements, part-time utilization, or roles requiring immediate start, contractors are typically less expensive when total cost is counted.

What is the total cost multiplier for a US software engineer? The total cost of a US-based software engineer is typically 1.25–1.45x their base salary, depending on benefits generosity, state, and overhead allocation. A $150,000 base salary engineer costs approximately $190,000–$220,000 per year all-in, or $91–$106/hr at 2,080 annual hours. In year one, recruiting and onboarding add $20,000–$55,000 to that number.

How does the conversion fee affect the contractor vs. FTE calculation? If you plan to hire a contractor as a full-time employee, the conversion fee (typically $10,000–$50,000 depending on the platform and salary) should be treated as an additional recruiting cost in the FTE calculation. This cost reduces the apparent advantage of the contractor-to-FTE conversion path. If direct hire is a likely outcome, factor the conversion fee into the original engagement decision.

Get the engagement structure right the first time

If you're between contractor, FTE, and team augmentation on a real role right now, A.Team's scoping team runs through the cost model on your numbers in a 30-minute call.

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Continue the series

• FTE vs. contractor vs. team augmentation
• Individual contractors vs. managed teams