Contractor vs employee: which really costs less?

When the workload outgrows the owner, the first question is often “contractor or employee?” — and it’s usually framed as a cost question. The honest answer is that it’s a capacity, control and risk question that happens to have a cost attached.

Why do contractors charge more per hour?

A contractor’s rate isn’t just their “wage”. It has to cover everything an employer would otherwise pay, plus the realities of running their own business:

• their own super and insurance;
• unpaid leave, public holidays and sick days;
• tools, vehicle, phone and software;
• quiet weeks between clients;
• admin, quoting and chasing their own invoices;
• a profit margin.

So a contractor charging $95 an hour isn’t necessarily expensive compared with an employee on $38 an hour. The right comparison is full cost per productive hour.

How do the numbers compare? (Illustrative)

	Employee	Contractor
Headline rate	$38/hour base wage	$95/hour
Super (12%)	$4.56/hour	Contractor’s own cost*
Leave, public holidays	Paid by you	Contractor’s own cost
Workers compensation	Paid by you	Contractor’s insurance
Tools, vehicle, equipment	Often paid by you	Usually theirs
Productive hours	Around 1,500 of 1,976 paid hours a year	Only the hours you book
Approx. cost per productive hour	about $62–$70	$95
Cost at 1,500 hours a year	about $93,000–$105,000	about $142,500
Cost at 400 hours a year	about $93,000–$105,000 (still employed full time)	about $38,000

*Subject to the ATO’s rules on contractors paid mainly for labour. All figures are illustrative and exclude GST.

The pattern is clear. At full-time volume, the employee is cheaper. At part-time or occasional volume, the contractor usually wins. Somewhere in between is a crossover point, and it’s worth calculating for your own business.

What do you get with an employee that a contractor doesn’t give you?

• Control. You direct how, when and where the work happens.
• Continuity. Knowledge stays in the business; customers see the same face.
• Capacity to build on. Employees can be trained, promoted and given responsibility.
• Availability. They’re not juggling your job with three other clients.

What do you get with a contractor?

• Flexibility. A variable cost that stops when the work does.
• Specialist skills you only need occasionally.
• Speed — no recruitment process, often available quickly.
• Less admin — no payroll, leave records or award interpretation.

For a growing business, a common path is to use contractors while demand is uncertain, then convert to employees once the work is steady. Our guide to hiring your first employee covers the move.

Weighing up a hire that needs a few months of runway? See what you could qualify for — it’s a no-credit-check enquiry.

Why does classification matter?

Because the law looks at the real working relationship, not the title on the agreement. business.gov.au describes contractors as people who run their own business, use their own methods and tools, negotiate their fees and may work for multiple clients. If someone works only for you, under your direction, using your tools and set hours, calling them a contractor doesn’t make them one.

Getting it wrong can mean paying back entitlements, super and tax, plus penalties. The ATO also has rules under which some contractors paid mainly for their labour are treated as employees for super purposes. If you’re unsure, check the official tools or get advice before you start.

How do you decide?

Ask four questions:

1. How many hours a year will this work take? Run both costs at that volume.
2. Is the work ongoing and central to your business, or specialised and occasional?
3. Do you need to direct how it’s done?
4. What does your cash flow look like? A variable contractor cost may suit a business with lumpy income; an employee suits steadier trading. A 13-week forecast makes this visible.

Is there a middle path?

Between a full-time employee and an independent contractor sit several options worth considering:

• Part-time employment. Regular, predictable hours with pro-rata entitlements — often ideal when the work is steady but not full time.
• Casual employment. Flexible hours, with a casual loading in place of some leave entitlements under most awards. Suits variable demand, though regular casual patterns carry their own obligations.
• Labour hire. A labour-hire firm employs the worker and charges you an hourly rate that covers wages, on-costs and its margin. Useful for peaks or trials, usually at a higher hourly cost.
• Outsourcing a whole function. Bookkeeping, payroll, IT or marketing handled by a specialist firm that runs its own business.

Run each option through the same test: the total cost at your realistic volume of hours, compared with the value of the work. A spreadsheet with columns for each option and rows for each cost makes the comparison clear in half an hour, and the numbers feed straight into your break-even calculation.

Build capacity that pays for itself

Whether you add a contractor or an employee, the goal is the same: capacity that earns more than it costs. The cash flow gap between paying for that capacity and seeing the revenue it brings is where many growing businesses feel pressure.

We consider trading businesses for unsecured and line-of-credit facilities typically from $5,000 to $500,000, and property-secured loans from $20,000 to $5,000,000. Enquiring involves no credit check, your details aren’t shared around a panel of lenders, and a real person calls you. Give us accurate figures about your turnover and plans so we can suggest the right fit first time.

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