The Cost of Hiring a Mechanical Engineering Contractor vs. Full-Time Salaried Employee

In some situations, hiring an independent mechanical engineering contractor is better than hiring a full-time salaried employee with the same qualifications. However, employers must understand the difference between full-time and contract workers to determine the best hiring decision. Since most of the distinctions affect the employer financially, refer to the “employee status” classification established by the Internal Revenue Service.

In general, hired contractors are also your employees as they provide services for you but are not formally part of your company. Contractors pay their taxes on the money received for services provided. Alternatively, full-time salaried employees are part of the company’s in-house team. As their employer, you are responsible for overseeing their performance and work conduct and legally handling the withholding and reporting of their taxes. The following classification description can serve as a valuable reference to prevent overpayment, errors in distinguishing between these categories, and the potential incurring of substantial legal penalties.

Independent contractors

For the sake of simplicity, think of an independent contractor as another company. The employer pays for the services provided, whether on a one-time project or an ongoing basis, but the contractor remains independent of your business. A contractor must not abide by your company’s day-to-day operations and will perform the commissioned duties without strict supervision.

Depending on the terms of the agreement, the contractor may never need to show up at the office. The person can do the job from a separate location. For instance, when hiring a freelance finite element analysis & FEA engineering services consultant, the entire task is conducted through computer simulation, and the resulting data is swiftly transmitted as a digital file, eliminating the need for a physical office presence. The work can start immediately once the employer and the contractor agree on the project parameters (including job description and fee). Unless otherwise noted in the agreement, contractors are aware of the following responsibilities:

• File and pay taxes (local, state, and federal) on the payment received from the employer
• Supply the tools and equipment necessary for the completion of the project on their own
• Have their insurance needs covered
• Invoice the employer
• Expect only to receive payment as stated in the agreement

When an employer and a mechanical engineer sign the contract, it is safe to assume that both parties understand and accept all terms mentioned in the document. In addition to the project brief and payment schedule, the contract may include clauses about deliverables, project milestones, deadlines, and revisions, to name a few.

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Full-time employee

The IRS will classify a worker (who provides services for your business) as a full-time employee if you are legally allowed to dictate when, where, and how the person should perform their duties. In other words, the employer must continually direct, supervise, and oversee how the work is done. Another big difference between a full-time employee and an independent mechanical engineering contractor is taxation. The employer is required by law to report the taxes on the employee.

There are three criteria based on which the IRS classifies a worker as a full-time employee:

• Financial control: the employer is responsible for payroll taxation (including Social Security and Medicare) and determines paid leave as well as vacation
• Relationship: the employee is involved in ongoing business relationships with clients or customers and co-workers
• Behavioral management: to a certain degree, the employer may decide the work schedules and methods performed by the employees

Full-time employees most likely work at the location listed as the company’s address. The company makes available the tools and supplies necessary for the employees to perform the duties assigned. Employees are entitled to wages, workers’ compensation insurance, and overtime. The company is also responsible for fringe benefits like retirement plans and health insurance.

Cost of contract workers

Suppose you must hire a freelance mechanical engineering service with the same qualifications as a full-time employee to do the same services. In that case, the hourly rate is likely higher for the former. However, whether or not the contractor costs less in the long run depends entirely on the business needs.

The typical payment process for a contractor differs from the conventional payroll model. A contractor may accept a lump sum, a percentage of the project’s cost, or an hourly rate payment schedule. Regardless of the methods used, the procedure is quite simple. An employer and the hired contractor agree on the project parameters explicitly mentioned in the signed contract, including the scope of work and salary. The payment is made once all the job requirements are met. Mechanical engineering may ask for an upfront deposit or a portion of the total wage as a retainer. Generally, both parties fulfill their roles in the agreement; the contractors get the job done, and the employer provides the compensation. Although you don’t have to handle the taxation requirement for the contractor, you are still required to supply Form 1099 for the payments made.

Cost of full-time employees

An employer controls a full-time employee’s payment schedule and work performance, as well as the administrative details of the taxation. Salary employees are paid a set amount regularly per period, such as monthly, bi-weekly, or weekly. They receive overtime pay for any day they work longer than the scheduled hours. If the duties for the day are completed quicker than expected, they receive the full salary nonetheless. Hourly employees use a timesheet to log the hours worked. The wage equals the hours spent working. Either way, the paychecks are given weekly or monthly.

The employer withholds a portion of the employee’s salary for taxation and benefits purposes. The employees have agreed to authorize the payment of taxes with each paycheck. They can only worry about taxes at least once the time comes for filing tax returns, usually in April each year.

Extra Cost

There are at least three types of indirect costs associated with hiring a full-time employee:

• Fringe benefits: payments for retirement plans, healthcare, paid leave, and worker’s compensation
• Administrative: expenses attributed to accounting fees, legal fees, and administrative workers’ salaries
• Overhead: the business operational cost that cannot be attributable to a specific project, like office supplies, computer maintenance, hosting services, utility bills, and office rent.

According to Clarity 2022: Government Contracting Industry Study compiled by Deltek, the median percentage values for the indirect costs are 30% for fringe, 22% for general and administrative, and 25% for overhead. Cumulatively, the values equal to (1 + 0.3) x (1 + 0.22) x (1 + 0.25) = 1.98 cost multiplier.

RELATED: How Much Do Mechanical Engineer Services Typically Charge for Rates & Firms?

Cost comparison

Even if a mechanical engineering contractor and a full-time employee have the same rate of $60 per hour, the total expense incurred for the latter is more significant. Here is a simple breakdown of the calculation:

Using the median rate for the indirect cost (multipliers), a full-time employee costs almost twice as much as an independent contractor or nearly double the base salary. Unless the project runs for an entire year, the cost of hiring a contract worker can be much lower. However, every business has many long-term projects in which workers require close supervision. Only some mechanical engineering contractors can replace the equivalent full-time employee. As a company grows more prominent, it is not feasible to keep hiring mechanical engineering contractors for new product design services, prototype design engineering services, oversee a manufacturing process, or investigate equipment failures on behalf of the employer.

Payrate

Mechanical engineering is a high-paying profession. The Bureau of Labor Statistics (BLS) states that the average annual salary of a full-time mechanical engineer in the United States is $95,300 or an hourly rate of $45.82. The wage varies widely among different industries. For example, a mechanical engineer working in metalworking machinery manufacturing earns around $40 per hour. Still, an equally qualified professional hired by a crude oil company is paid an hourly rate of between $60 and $75. Sitting in the middle includes the architectural and engineering services industry, which offers an average hourly wage of $48.46, and R&D services, with an average pay of $54.78 per hour.

On the freelancers’ side, a mechanical engineering contractor may cost between $50 – $80 per hour in the United States and Canada. A professional with an experience level of more than ten years in the industry may charge between $100-200 per hour, depending on the scope of work. If the professional is based outside North America, you will likely get a lower rate (but not necessarily a better deal). For instance, the typical hourly rate for a freelance mechanical engineer in India goes from $30 to $50.

RELATED: Learn About Machine Design Costs, Engineering Services Rates & Pricing for Companies

Mechanical Engineering Hourly Rates

This table provides approximate information on hourly rates in the field of mechanical engineering. These figures can vary based on individual qualifications and specific job requirements.

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