Payroll · Canada
Salary to hourly.
Convert an annual salary into an effective hourly rate, factoring in your work schedule and unpaid vacation. Below: why a contractor quoting that rate would take a large pay cut, and what the rate needs to be instead.
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Hourly rate
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Two ways to think about an hourly rate
Nominal: salary divided by hours per week × weeks per year. This is the on-paper number.
Effective: nominal, but reducing total hours for paid vacation and stat holidays. This is what your salary actually pays per hour worked.
The number this gives you is not a contract rate
The most common use of this calculation is also the most expensive mistake in Canadian freelancing: someone leaving an $85,000 job divides by 2,080, gets roughly $41 an hour, quotes that as their consulting rate, and takes a very large pay cut without noticing.
The salaried hourly figure and a contract rate are not the same quantity. A salary is one line in a much larger compensation package, and when you contract you are buying every other line yourself. Four things have to be added back.
1. You pay both halves of CPP
An employee pays one share of CPP and the employer quietly matches it. A self-employed contractor is both parties and pays both shares on net business income. Nothing about the entitlement changes: you are simply now funding the half your employer used to. There is partial relief in that you may deduct the employer half when computing net income, but it is a real and immediate increase in what the same gross income costs you. The self-employment tax calculator works this through.
2. Nobody pays you for time you are not billing
This is the biggest single adjustment and the one people skip. A salary pays for 52 weeks. A contract rate is earned only on hours a client will actually pay for, and the gap between the two is wide:
- Vacation you take is unpaid.
- Statutory holidays are unpaid.
- Sick days are unpaid, and there is no short-term disability plan behind you.
- Sales, proposals, scoping calls and follow-up are unpaid.
- Bookkeeping, invoicing, chasing late payment, taxes and filings are unpaid.
- Training and keeping current are unpaid.
- Gaps between contracts are unpaid.
A full-time employee is available roughly 2,080 hours. A working solo contractor typically bills something in the range of 1,300 to 1,600 hours in a good year. That alone means the rate has to be materially above the salaried hourly figure before anything else is considered: dividing by billable hours rather than calendar hours is the single correction that matters most.
3. Benefits, pension and EI protection disappear
Health and dental coverage, life and disability insurance, and any employer pension or RRSP match all vanish, and a match is the harshest loss because it was free money you cannot recreate by earning slightly more. Self-employed Canadians also generally do not pay EI premiums on business income and correspondingly cannot claim regular EI benefits if the work dries up: there is an opt-in route to certain special benefits, but the ordinary unemployment safety net is not there by default.
4. GST/HST, and the fact that it is not yours
Past the small supplier threshold of $30,000 in taxable revenue over four consecutive calendar quarters, you must register and charge GST/HST. It is not income (you collect it and remit it) but it does change how you quote, and clients will assume a stated rate is before tax unless you say otherwise. Which province’s rate applies depends on your client rather than on you: see which sales tax to charge.
A sane way to set the rate
Work backwards rather than forwards. Start from the total annual income you need, add the employer-side costs you are now carrying yourself, add a realistic allowance for unpaid vacation, holidays and sick time, then divide by the hours you will genuinely bill: not the hours you will work, and certainly not 2,080. Whatever multiple of the salaried hourly figure that produces is your actual floor, and it is normally a good deal higher than instinct suggests.
Then sense-check the other direction: what would an employer pay in total to have this done by staff? The employee cost calculator shows the fully loaded figure, and a contract rate that comes in below a client’s fully loaded cost of doing it in-house is defensible in a way that a rate pulled from a salary division is not.
Going the other way (you have an hourly wage and want the annual equivalent) use hourly to salary, which also covers provincial overtime thresholds and how vacation pay is added to Canadian hourly wages.
TNAADO Inc. · Toronto
This number is not a contract rate
Dividing a salary by hours tells you what the salary pays per hour worked. It does not tell you what to charge as a contractor, and the gap is large. A salary is one line in a package. Contracting means buying the rest of that package yourself: both halves of CPP instead of one, unpaid vacation and statutory holidays, no benefits and no employer pension match, and no ordinary EI safety net on business income.
The mistake people make. Quoting the divided figure as a rate. The bigger error underneath it is dividing by 2,080 calendar hours rather than by the hours a client will actually pay for, which for a working solo contractor is far fewer. Work backwards instead: start from the income you need, add the employer-side costs you now carry, allow for unpaid time, then divide by billable hours. Remember GST/HST registration becomes mandatory past $30,000 of taxable revenue over four consecutive calendar quarters.
Frequently asked questions
How do I convert my salary to an hourly rate?
Divide the annual salary by the hours you are paid for in a year. The conventional figure is 2,080 (40 hours across 52 weeks) so $85,000 divided by 2,080 is about $41 an hour.
That is the nominal rate. The effective rate is higher, because a salary also pays you for vacation and statutory holidays you did not work: dividing by actual hours worked, typically closer to 1,900 for a full-time schedule, gives what your salary really pays per hour of effort.
What contract rate do I need to charge to match my salary?
Substantially more than salary divided by 2,080, because as a contractor you now fund everything the employer used to. You pay both halves of CPP, you have no paid vacation, statutory holidays or sick days, you lose employer health benefits and any pension or RRSP match, and you generally cannot claim regular EI benefits.
The largest correction is the denominator. A solo contractor typically bills somewhere between 1,300 and 1,600 hours a year rather than 2,080, because sales, admin, invoicing, training and gaps between contracts are all unpaid. Divide the income you need by billable hours, not calendar hours, and the required rate is usually well above what a naive salary division suggests.
What is the difference between the nominal and effective hourly rate?
Nominal divides the salary by the hours you are paid for. Effective divides it by the hours you actually work, after removing paid vacation and statutory holidays from the total.
The effective rate is always the higher of the two, and the gap is a fair way to value paid time off: a job with generous vacation has a higher effective hourly rate at the same salary, which is exactly the sense in which the vacation is worth money.
Do I need to charge GST or HST on my contract rate?
Once you pass the small supplier threshold of $30,000 in taxable revenue over four consecutive calendar quarters, registration is mandatory and you must charge it. Below that it is optional.
The tax is never part of your rate (you collect it and remit it) but state clearly whether a quoted rate is before or after tax, because clients assume before. Which province’s rate applies is determined by your client’s address rather than yours under the CRA’s place-of-supply rules, so the same rate can carry 5% for one client and 13% for another.
Disclaimer
Estimates for educational purposes only. Doesn't include benefits, RRSP matching, bonuses, or non-cash compensation.