Hiring a Freelancer vs. an In-House Employee: A Cost Comparison

The main attraction of freelancers to business owners is their potential to save costs. This makes them an essential tool for the health and overall growth of businesses. That’s why every 3 in 4 employers prefer hiring freelancers.
Carolyne Njeri

Carolyne Njeri

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There are 4 million more freelance workers in the world now than there were in 2014, according to a recent report by SkillScouter. The growth of freelancing has been unbridled for the past few years, as more and more employers opt to hire gigsters in place of full-time employees. Freelancing is beneficial to both the workers and employers because employees enjoy flexibility and freedom over their careers and employers get top services on demand. But the main attraction of freelancers to business owners is their potential to save costs. This makes them an essential tool for the health and overall growth of businesses. That’s why every 3 in 4 employers prefer hiring freelancers.

In this article, we will break down the costs of hiring a freelancer vs an in-house employee, to get a clear picture of how much it will cost to hire either for your next project.

Costs of hiring a freelancer

 

Independent employees can be paid a lump sum amount or get compensated by the hour depending on the employer or the type of project to be undertaken. You pay the freelancer the exact amount you agreed on, at intervals left to your discretion.

When you hire a freelancer, you don’t have to concern yourself with how their pay will get taxed or provide fringe benefits like medical insurance. In the US for example, it is estimated that employers save $5,483 annually on health insurance payments for every freelancer that they hire. Because they are independent contractors and not employees, you are not compelled to offer any additional financial support to them aside from their agreed rate. With freelancers, you get exactly what you pay for.

Hiring freelancers can be a long and tedious process for your team, which can be considered a source of additional costs. But making use of Ureed.com’s platform makes it easy for you to recruit your next hire with ease. Ureed.com connects you with 35K+ freelancers within minutes of registering.

Cost of hiring an in-house employee

 

This expert from MIT estimates that the real cost of hiring an employee is 1.35 times higher than their base salary. This is because of additional costs like taxes and insurance that are incurred to maintain them on the payroll.

Here is a breakdown of additional costs for hiring a full-time employee:

Recruitment and Training

 

The Society for Human Resources Management reports that the cost of hiring and training a new salaried employee can cost up to 6-9 months worth of salary. Another estimate, by the Centre for American Progress, shows that the cost of turnover – the annual changes that occur in a workforce, from employees leaving to new hires – can reach up to 213%. This is because orientation and integration into your existing labour force requires a considerable amount of time.

Although hiring either type of employee involves some level of uncertainty, freelancers do not require a budget for training as they are already established professionals in their field. They’re ready to hit the ground running immediately after getting hired.

Taxes

 

If you are hiring a full-time employee in the US, you have to include additional compensation for:

  • Payroll tax- 15% of their salary
  • Social Security- 6.2% on each employee wage
  • Medicare (health insurance)- 1.45% on each employee wage
  • Unemployment insurance- 6% on their first $7,000
  • Workmen’s compensation- around 2% of their wage

On top of this, you have to hire an accountant to manage your payroll and keep track of expenses. But if you hire a freelancer you won’t have to concern yourself with their tax payments.

While these additional payments vary according to the laws of each country, most countries adhere to a similar structure as that of the US.

Benefits

 

In-house employees require benefits. These include:

  • Health coverage: around $2000 per employee
  • 401 (k) saving plan
  • Life assurance
  • Dental insurance
  • Discounts on certain services

Vacation

 

Your full-time employees are entitled to paid vacations and sick days. If they get, say, 2 weeks of vacation and 8 sick days, that’s 7% of the work year, and that leave period needs to be paid.

Distractions

 

In-house employees can get distracted easily from their job because of things like workplace banter, countless meetings, surfing the internet, small workloads, etc. Also, they are prone to getting disengaged or uninterested from their work from time to time. It is estimated that employees waste at least 2 hours per day, costing companies $759 billion annually.

This is unlike freelancers, whose stakes are higher because their ability to  get rehired for future jobs depends on their productivity and output.

Office Equipment and Space

 

Your employees require a comfortable workspace as well as equipment to be able to carry out their daily activities. These costs vary from company to company depending on the premises and type of technology required. Running a fully functional office space also accrues additional costs like rent, electric and water bills, cleaners, etc. These costs add up in the long run.

Final Estimate: A side by side comparison

 

Assume you want to hire a software developer and want to know how much it will cost you to either go with a full-time employee or a freelancer. Let’s break down the costs.

A top-rated freelance software developer on Ureed.com charges $80/hour. According to the US Bureau of Labor Statistics, a full-time software developer is paid $107,510 annually. Let’s work with the assumption that they work 40 hours per week for 49 weeks in a year.

Right off the bat, the cost of your in-house employee increases by 1.35% because of benefits and insurance, bringing their salary to $145,138.50. Then include 15% payroll tax, $5000 (estimate for office space and equipment), $7,525.70 for paid vacation and sick days (7% of the base salary) and $7,590 for wasted time. This brings the annual cost of your full-time employee to $181,380.70.

The freelancer, working for $80 per hour for 40 hours a week for 49 weeks earns $156,800.

The Verdict

 

From this estimate, your freelance employee costs you almost $30,000 less to maintain. Aside from their agreed rates, freelancers don’t cost you any additional expenses. They are also flexible, can take on more work than the regular employee and in most cases don’t require training. Hiring fulltime employees is still the right decision for many situations and companies, but for those aiming to cut costs and in need of specialized tasks, hiring freelancers is the way to go.

To connect with vetted freelancers, register on Ureed.com where thousands of professionals are ready to offer their services to you at competitive prices.