The Real Cost of Freelancers vs. Employees

April 13th, 2017

freelance
 

By Michael Solomon, 10x Management Co-Founder

How much does hiring a new employee really cost?
We all know some of the benefits of having full-time employees. They learn the business well over time, they become part of a team and contribute to the environment and culture of a company. Some full-time employees really grow into their roles, and they continue to excel as more work and responsibility are assigned to them.

Finding and hiring the right full-time employee can be a great experience. Company culture is important, and if you are truly trying to build something that lasts having a core team of full-time employees is key. However, even if that is true, hiring freelancers is an important and essential tool for the efficacy and long-term health of your business. Rather than take a look at this from a qualitative standpoint which we have done previously here and here, I will perform a quantitative analysis on the comprehensive costs of hiring a new full-time employee versus the true costs of working with a freelancer and compare the two. Ultimately, a blend of full-time employees and freelancers leaves your business more cost-efficient and is a very logical approach for a company’s long-term health.

Let’s use one example to illustrate my point and perform this cost analysis.

Let’s say you have a new project  that you need completed  that will take exactly one year to build and launch. Let’s explore your 2 development options:
1. You can hire a full-time, senior software engineer for $135,000 per year.
2. You can hire a senior freelancer for $150 per hour.

Both have their qualitative pros and cons. The full-time employee will learn the ins and outs of the business, be ingratiated into the corporate culture, get to spend time with management, and become a valuable team member. The freelancer will learn some of the the ins and outs of the company, likely in less detail and they’ll primarily focus on learning the needs of the project, in order to work quickly and effectively.

But what is the real cost of the $135,000/year full-time employee vs. the $150/hour freelancer?

For the purposes of simplicity, this is the example we will be working with. Let’s start at the top.

Recruiting and Training
The Cost: The Center for American Progress estimates that for high-level positions that require advanced education, the costs of hiring a new employee can be 213% of annual salary. In other words, the cost to hire an engineer earning $135,000 could actually be $287,550.

The Society for Human Resources Management is more conservative and estimates that the average cost of hiring and training a salaried employee is about 6 to 9 months of salary. For a $135,000 employee, that means it will cost $67,500 to $101,250 to fill the position.

Truth be told, recruiting can be difficult for both full-time employees and freelancers. There is no guarantee that the person you bring on board will be effective in either situation. For finding full-time employees, recruiting agencies make life easier, but of course there are fees associated with finding the best and the brightest. On the freelance side, vetting can be extremely difficult as well. Companies like mine, 10x Management, take the hassle out of finding qualified talent without a fee.

Once you’ve made the decision to hire a candidate, training is one of the costliest investments that a company makes. Orientation and integration takes time. This is where having an experienced freelancer really saves you. The best freelancers come to jobs ready to begin on day one and require less training than a standard employee. You might say that being ready for new jobs and challenges is hardwired into freelancers. This is not because freelancers are inherently better at training but because they only need to know exactly what the task requires. They don’t need to know about all your policies, fringe benefits, ping pong rooms and happy hours. Advantage: Freelancers

Taxes
The Cost: If you’re hiring a full-time employee, you need to include allowances for:
Payroll Tax – 15% of an employee’s salary;
Social Security – 6.2% on each employee’s wage up to $118,500;
Medicare – 1.45% on each employee’s salary;
Federal Unemployment Insurance – 6% on first $7,000 of employee’s wages;
Workmen’s compensation – depends but we’ll say on average about 1.85% of employee’s wages. On top of that, keeping track of expenses can be complicated, so hiring an accountant may make sense for your company depending on the size. We’ll leave that expense off the books for now.

If you’re hiring a freelancer, you don’t have to worry about paying taxes. Advantage: Freelancers

Benefits
The Cost: Full-time employees require benefits. These include:
Health coverage – $2,000 to $3,000 per employee;
401k savings plans; vacation;
Life insurance;
Dental insurance.


According to Joe Hamzida, senior lecturer at MIT Sloan School of Management, after including taxes and benefits, the costs of hiring a full-time employee for a company are actually roughly 1.35 times base salary.

In other words, our $135,000 full-time employee actually costs $182,250 per year, and this is not including recruiting and training expenses. Again, freelancers do not require benefits or vacation, so you are only paying for the time that they are working. Advantage: Freelancers

Vacation
Let’s assume 3 weeks of vacation and 5 paid sick days per year. That’s 7.7% of the full work year. Right off the bat, your full-time employee will not be working 7.7% of the work year. At an annual salary of $135,000, that’s $10,395 where you are paying for vacation and sick time. Freelancers, on the other hand, may take vacation or sick days, but are not paid for these vacation or sick days. Advantage: Freelancers

Meetings & Distractions
It’s no surprise that US employers spend $759 BILLION each year on work that’s not actually done. Countless meetings, water cooler talk, surfing the internet, and lack of sufficient workload are serious problems that plague many workplaces. With full-time employees, you run the risk that they feel bored and disengaged from their jobs after a certain amount of time, and you are paying people for work that becomes routine and lackluster. Freelancers are judged solely by their output, so if the result is lackluster, it is likely they will not be in business for very long. Plus, when they go out to get coffee or lunch, they’re not on the clock…so you don’t pay!  Advantage: Freelancers

Office Space & Equipment
Furnishing the office, providing physical space and providing the proper technological equipment (laptop, phone, etc.) all add up. While technology can range vastly in price, let’s assume on average that for office space and equipment we are spending $5,300 per full-time employee. Depending on the job, you may have to provide a freelancer with physical space in which to work, but likely not any other equipment.

The Final Tally
It isn’t difficult to see that the costs involved in hiring a full-time employee go beyond the salary. There are recruiting costs, and training costs, and taxes and benefits, and vacation, and lost productivity in meetings and distractions, and office space and equipment. All of these costs add up. Excluding recruiting and training, with taxes and benefits alone you are paying 1.3 to 1.6 times the base salary for each employee. Our $135,000 per year full-time employee actually costs $175,500 to $216,000 per year. Freelancers, on the other hand, generally charge by the hour and their rate is exactly what you pay. Whether it’s a high tech freelancer from 10x Management, or a freelancer for research, writing, or a number of other services, a flexible, on-demand workforce allows you to scale your business with great efficacy.

Let’s do the math, and compare our $150/hour freelancer to our $135,000 full-time employee and assume you are hiring both at the same time and that they both work a full year:
1. Assume a 40 hour work week
2. 49 weeks per year x 40 hours per week = 1,960 hours per year

 

Freelancer Full-Time Employee
$150/hour

x

1,960 hours (52 weeks minus 3 weeks for vacation)

 

 

 

 

=

________________________________________________

$294,000

$135,000 base salary

  • $100,000 (Recruiting & training)
  • $20,250 (15% Payroll tax)
  • $33,000 (Insurance & other benefits)
  • $5,300 (Office space & equipment)
  • $7,590 (Wasted time)
  • $10,395 (Lost time to vacation/sick days)

=

________________________________________________

$311,535

 

After the first year, assuming your full-time employee stays on board and you subtract recruiting and training, your full-time employee will cost you approximately $211,535/year.

The rub is that average job tenure for technology jobs is falling and even at cream of the crop companies like Google, average job tenure is 1.1 years.

As the numbers indicate, if you are looking for a long-term solution to a problem, a deeply dedicated team member, or you know that you will need someone on a project for many years, then hiring a full-time employee might make financial sense. But if you have a project that needs to be done in the short or medium-term, or you need to satisfy demand at peak times or any of these other reasons, then hiring freelancers is a very viable and financially sound alternative. Having a structure at your company where 70% of needs are met by freelancers and 30% are handled by full-time employees will keep your company flexible and ready to take on new challenges.

It’s clear that both the freelance employee and the full-time employee are expensive, but the costs are not always so cut and dry. There are a lot of considerations to take into account when hiring someone. I am not saying definitively that freelancers are better for a business than full-time employees, but I am trying to show that freelancers should sometimes be considered as a comparable price alternative to full-time employees, even when that does not appear to be the case.

 

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