The Costs of Hiring a Freelancer vs. In-House Employee

As business leaders embrace freelancers as a central component of their staffing strategy, they realize a myriad of benefits. By engaging independent professionals, companies can access the skill sets they need for any given project. 

Accordingly, independent talent can keep a workforce agile, enabling swift adaptation to meet new opportunities and challenges. Therefore, it’s no surprise that three-quarters of hiring managers plan to continue or increase their use of freelancers in the months ahead.

But there’s another key benefit to hiring independent workers, one that managers sometimes struggle to quantify clearly. In many instances, hiring a freelancer can generate serious savings for your business. Moreover, this cost calculus can be true for both time-limited projects and more extensive engagements.

How can you assess your potential savings and compare costs for workers of each kind? In this article, we’ll break down the expenses associated with hiring a freelancer and an in-house employee, respectively, unpacking the drivers of cost in each case. 

For a snapshot of the relative costs that we’ll be covering, check out this chart:

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Costs of hiring a freelancer

When it comes to compensation, working with freelancers can be simple. You pay an hourly rate or established set fee. That’s it.

As self-employed individuals, freelancers set their own rates. These set rates account for the costs associated with doing business as an independent professional, including overhead costs, benefits and taxes, since they—and not your company—are responsible for paying these expenses. 

Upwork makes the process of hiring and managing on-demand freelancers easy. Our work marketplace can help you find the top professionals, agree to terms, and pay them once the work is complete. 

And if you need additional logistical support, our compliance and payroll services help you classify and compensate all your workers properly, allowing you to focus on other priorities.

Costs of hiring an in-house employee

When we conceive of the costs of in-house employees, we often consider their salaries or hourly pay rates. But as hiring managers know well, pay represents just one component of the total cost of employment. 

According to the Small Business Administration (SBA), the general rule of thumb is that the real cost of an in-house employee is typically 1.25 to 1.4 times more than an employee’s salary. That’s because businesses assume a range of expenses and tax obligations when they agree to hire a professional in-house. 

Here are some of the additional costs that hiring an employee can entail:

Payroll taxes

When you hire an in-house employee, you consent to pay multiple federal taxes associated with this employment arrangement. These include the following, which are typically calculated as a percentage of the employee’s salary:

In addition to these costs, you might be responsible for state payroll taxes for each employee.

Insurance and other expenses

In virtually all instances, employers are responsible for purchasing workers’ compensation insurance to cover the costs of supporting employees injured on the job. With additional employees, the price of this coverage rises. State laws differ significantly, and your workers’ compensation costs will reflect the nature of your business, but it’s a significant expense for most companies.

Another cost consideration: In-house hiring costs vs. external help finding freelancers

Beyond the ongoing costs associated with hiring an in-house employee, it’s essential to consider the upfront expense of bringing someone on board.

The in-house HR process entails slightly different costs in each industry, but the following expenses are common in most fields: 

Recruiting costs 

• Time of internal HR team 
• Time of team conducting interviews 
• Job board fees
• Background check and drug screens 
  

Administrative costs

• Time of the administrative team to enroll new employees in benefits, payroll, etc. 
• Fees associated with enrolling new employee in benefits programs 
  

Deferred productivity cost 

• Cost to productivity while new employee gets up to speed
  

Provisioning costs

• Cost of equipment necessary for employee to perform duties 
• Cost of new accounts for required software programs 
  

Training cost

• Time of team training new employee 
• Cost of training programs for new employee
  

By contrast, skilled freelancers generally don’t require training, equipment or as much administrative overhead. They can get to work right away without creating much additional effort or expense from your broader organization.

Perks of hiring freelance talent

Freelancers provide their own equipment and cover the costs of tools they need to get the job done, from laptops to software, subscriptions, and more.

Additional benefits of hiring freelance talent include: 

• Ease of onboarding: Since many freelancers are experts in their fields and only engaged for discrete projects, you typically won’t have to invest in as much training and onboarding. 
• Flexibility: Freelance talent is there to help you when needed, offering support when you need it most. Freelancers often have flexible work schedules that may help address your needs. ‍
• New perspective: Working with freelance talent can bring a fresh perspective to your team’s project. Different ways of thinking and looking at a project can bring innovation, allowing you to address projects in a new and exciting way.

Cost estimate comparison: freelancer vs. in-house employee

While the costs described above outline some of the additional expenses associated with hiring in-house employees, you may still be looking for a more specific way to quantify the financial benefits of using freelancers. And because freelancers often charge hourly, it can be hard to compare their pay to that of a salaried employee.

Clearly, you’ll need to perform your own cost calculus regarding the expense of each option. To obtain a precise comparison, you’ll need to calculate the costs of benefits, payroll taxes, workers’ compensation and other expenses for your organization.

However, there is a simple way to estimate the hourly costs of an in-house employee relative to an independent worker. This approach should provide a basic rule of thumb to inform your hiring decisions.

Using the example of hiring a software developer, we’ll walk you through each of the steps below:

1. Get hourly rates from the top freelancers. In this example, we’ll imagine that the freelance software developer you hope to hire charges $70 per hour.

2. Set the annual salary you’re willing to pay an employee. According to the BLS, the median annual pay for a software developer is $110,140 per year.

3. Multiply that annual salary by 1.325. As mentioned above, experts say true employment costs typically range from 1.25 to 1.4 times an employee’s salary. For this general estimate of annual employment costs, split the difference between those figures. In our example, $110,140 times 1.325 is $145,935.50.

4. Divide that number by 1,779. According to the Organization for Economic Cooperation and Development (OECD), this is the average number of hours worked by American employees in 2019. Dividing by this total, therefore, gives us an effective hourly rate for in-house employees. $145,935.50 divided by 1,779 is $82.03.

5. Compare these hourly rates. In our example, the calculated hourly rate for the in-house software developer was $82.03, whereas the hourly rate charged by the freelancer was $70. In other words, the freelancer would save you $12.03 for every hour of work.

To compare rates on an annual basis, multiply the hourly differential by 1,779. When you multiply the $12.03 differential by 1,779 (the average number of hours worked each year), you get $21,401.37 in annual savings.

Deciding which kind of worker to hire

Depending on the needs of your team, you may want to work with a freelancer. In this next portion of the article, we’ll break down factors to consider when deciding between independent and in-house team members.

When to consider hiring freelance talent

Here are a few reasons why hiring a freelancer might be the better option for your company. 

• You need a highly specialized expert in a field. Plenty of freelancers have years of experience and highly specialized skills, allowing them to bring incredible value as experts. Whether you need highly skilled professionals on a very short or longer term basis, working with freelance talent can allow you to do so.
• You want to be more agile. In today’s challenging environment, it’s essential to make crucial decisions as quickly as possible. Working with freelance talent allows your business to work differently and efficiently, addressing workforce needs quickly without the delay of sourcing and hiring an in-house employee. 
• You need to find someone to help with an urgent, short-term project. Is a project due in a short amount of time, and your team is slammed with work? Hiring freelance talent might be the perfect solution. Often, it’s easier and quicker to identify quality talent. Additionally, the hiring process for freelance talent is less intense, allowing you to find the ideal candidate and get started in no time. 

Your team has too much on their plate. Is your team loaded with too much work? Outsourcing talent can help redistribute the workload for a defined period of time without becoming a huge financial expense for the company.

Common myths of hiring freelancers

We’re not suggesting that you replace employees with independent professionals. Rather, companies should assess their own talent gaps critically, evaluating the advantages of hiring an employee or freelancers for each role.

As the world’s work marketplace, we’ve seen companies engage independent professionals successfully in a wide array of circumstances. Additionally, many companies have found success with building teams composed of a mix of full-time employees and independent professionals who work closely together. 

Many business might be wary of hiring freelance talent based on some of these misconceptions:

• Freelancers are only capable of novice work. Many freelancers are experts in their field. By freelancing, independent professionals can develop specialized skill sets, which isn’t always an option in a traditional office. 
• Freelancers can only be hired for task-based work. Many freelancers can be hired to work on ongoing projects with specific, defined milestones. Depending on your team’s needs, you can hire a freelancer on several projects over time. 
• Freelancers can only be hired for short-term work. Although you can hire freelance talent for short-term work, independent talent can play an integral role in a short period of time, and as you build a relationship, you can hire them again for future projects as needed. 

Engaging top freelance talent: lower costs, higher expectations

If you’re eager to add the top independent talent to your team, Upwork is here to help you succeed. Our platform makes it easy to engage independent professionals from around the globe, improving work quality while reducing costs. 

When you’re ready to start your search, it’s simple. Start by posting a job with a description of the skill sets you want. You can wait for freelancers to reach out with proposals or even search for the most qualified freelancers by filtering for particular skills and requirements. Once you’ve identified the top talent, you can conduct a video interview to get a better sense of the person’s abilities and explain project deliverables.  

Whether you need an experienced developer for your software development team, a market research analyst for your digital marketing team or a graphic designer to improve your brand’s logo, Upwork can help you find the talent you need when you need it.