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. 

Independent talent can keep a workforce agile, enabling companies to adapt swiftly to meet new opportunities and challenges. This is a primary reason that three-quarters of hiring managers plan to continue or increase their use of freelancers in the foreseeable future.

But there’s another key benefit to hiring gig economy workers and independent contractors, one that managers sometimes struggle to quantify. Often, 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 when it comes to freelancers vs. employees.

How can you assess your potential savings and compare costs for each of these workers? In this article, we’ll break down the expenses associated with hiring a freelancer and an in-house employee, and unpack 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 set fee. That’s it.

As self-employed individuals, freelancers set their own rates and are responsible for their own self-employment taxes. These set rates account for the costs associated with doing business as an independent professional, including overhead costs and benefits such as health insurance, 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 freelance work marketplace can help you find the top professionals, agree to terms, and pay them once the work is complete, all while offering the benefit of remote work.

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 for full-time employment

When we think about the costs of in-house employees, it’s natural to to consider their fixed salaries or hourly pay rates. However, as hiring managers know well, pay is just one part of the total cost of employment. 

According to the Small Business Administration (SBA), the rule of thumb is that the real cost of an employee in a full-time job 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 hire a professional in-house. The company also agrees to pay benefits such as healthcare, sick days, vacation time, retirement plans, and more, which can be significant costs especially for startups and small business owners.

Some of the additional costs that hiring an employee can entail are covered below.

Payroll taxes

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

• Federal Insurance Contributions Act (FICA). This tax funds Social Security and Medicare programs, helping retirees, people with disabilities, and children. Employers must match employees’ contributions for a total of 15.3%.
  
  • Social Security. In 2020, the employer tax rate was 6.2% of an employee’s income, up to a maximum income of $137,000. All income in excess of that total is not subject to Social Security taxes.
  • Medicare. In 2020, the employer tax rate was 1.45% of the employee’s total income.
• Federal Unemployment Tax. Under the Federal Unemployment Tax Act (FUTA), this tax was created to help fund unemployment benefits. However, most companies see a reduced rate if they pay state unemployment taxes.

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, you’ll need 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 checks and drug screens 

Administrative costs

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

Deferred productivity cost 

• Cost to productivity while a new employee gets up to speed

Provisioning costs

• Cost of equipment necessary for the 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 support you when you need it most. Freelancers often have flexible work schedules based on their own work-life balance 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.

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.

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

• Get hourly rates from the top freelancers. In this example, we’ll imagine that the freelance software developer you hope to hire charges $80 per hour.
• Set the annual salary you’re willing to pay an employee. According to the BLS, the median annual pay for a software developer is $130,160 per year.
• 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, $130,160 times 1.325 is $172,462.
• Divide that number by 1,799. According to the Organization for Economic Cooperation and Development (OECD), this is the average number of working hours by American employees in 2023. Dividing by this total, therefore, gives us an effective hourly rate for in-house employees. $130,160 divided by 1,799 is $95.86.
• Compare these hourly rates. In our example, the calculated hourly rate for the in-house software developer was $95.86, whereas the hourly rate charged by the freelancer was $80. In other words, the freelancer would save you $15.86 for every hour of work.

To compare rates on an annual basis, multiply the hourly differential by 1,799. When you multiply the $15.86 differential by 1,799 (the average number of hours worked each year), you get $28,532.14 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 bring essential skills and knowledge to your team.
• You want to be more agile. In today’s challenging environment, leaders often need to be decisive. 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 permanent 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. Upwork makes finding quality independent talent easy. 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 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 freelancer for each role.

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

Many businesses have expressed concerns about hiring freelance talent based on some of these misconceptions:

• Freelancers are only capable of novice work. Many freelancers are experts in their fields. With a freelance career, independent professionals can develop specialized skill sets, which isn’t always an option on-site 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 work odd hours. While some may work during their chosen hours, freelancers are perfectly capable of working as part of a team as needed, achieving proper time management, and optimizing their own schedules.
• Freelancers can only be hired for short-term work. It’s true that when you hire freelance talent for short-term work, they often play an integral role in your project. But they can also be invaluable for long-term projects and, as you build a working relationship, you can hire them again for future projects as needed. 

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Engaging top freelance talent: Lower costs, higher expectations

If you’re eager to add expert independent professionals 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. Post a job with a description of the skill sets you want. You can wait for freelancers to reach out with proposals or you can 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.

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Upwork is not affiliated with and does not sponsor or endorse any of the tools or services discussed in this article. These tools and services are provided only as potential options, and each reader and company should take the time needed to adequately analyze and determine the tools or services that would best fit their specific needs and situation.