You're looking at two offers:
- Full-time: $120,000/year + benefits + RRSP matching + paid vacation
- Contract: $90/hour, 6-month term, renewable
Which one is better?
The answer isn't obvious. And making the wrong choice can cost you tens of thousands of dollars—or leave you without health coverage when you need it most.
Let me break down the real math.
The Three Types of Tech Employment in Canada
Before we compare, you need to understand what you're comparing:
1. Full-Time Employee (T4)
| Aspect | Details |
|---|---|
| Tax form | T4 slip |
| Employer deducts | Income tax, CPP, EI |
| Benefits | Usually included (health, dental, RRSP) |
| Vacation | Statutory + company policy (typically 3-4 weeks) |
| Job security | Protected by employment standards |
| Termination | Entitled to severance/notice |
2. T4A Contractor (Self-Employed)
| Aspect | Details |
|---|---|
| Tax form | T4A slip (if not incorporated) |
| Tax deductions | None at source—you pay quarterly installments |
| Benefits | None—you buy your own |
| Vacation | None—unpaid time off |
| Job security | Contract terms only |
| Termination | Per contract—often 2 weeks notice |
3. Incorporated Contractor (INC)
| Aspect | Details |
|---|---|
| Structure | You operate through your own corporation |
| Tax form | Invoice the client company |
| Benefits | None from client—purchase through corporation |
| Liability | Corporation is liable, not you personally |
| Tax advantages | Potential tax deferral, income splitting |
| Setup cost | $1,000-$3,000 + annual accounting ($2,000-$5,000) |
Contract Rates vs. Full-Time Salaries: 2026 Data
Full-Time Software Engineer Salaries (Annual)
| Level | Median Total Comp | Range |
|---|---|---|
| Entry-Level | CA$82,000 | CA$68,000 - CA$100,000 |
| Mid-Level | CA$118,000 | CA$100,000 - CA$132,000 |
| Senior | CA$148,000 | CA$130,000 - CA$180,000 |
| Staff/Principal | CA$180,000+ | CA$150,000 - CA$250,000+ |
Sources: Levels.fyi, PayScale
Contract Hourly Rates (Toronto, 2026)
| Role | Low | Mid | High |
|---|---|---|---|
| Java Developer | $65 | $90 | $130 |
| JavaScript Developer | $75 | $95 | $140 |
| Front End Developer | $65 | $90 | $130 |
| Full Stack Developer | $75 | $95 | $130 |
| .NET Developer | $55 | $75 | $130 |
| Python Developer | $70 | $90 | $130 |
| Cloud DevOps Engineer | $85 | $110 | $150 |
| Data Engineer | $80 | $100 | $140 |
| Solutions Architect | $100 | $120 | $160 |
Source: Morgan McKinley 2026 Contract Salary Guide
S.i. Systems Canada IT Contractor Rates (2025)
| Role | Intermediate | Senior |
|---|---|---|
| Backend Developer | $84/hr | $104/hr |
| Frontend Developer | $78/hr | $96/hr |
| Full Stack Developer | $89/hr | $110/hr |
| Cloud DevOps Engineer | $109/hr | $134/hr |
| Solutions Architect | $100/hr | $124/hr |
| Enterprise Architect | $131/hr | $162/hr |
Source: S.i. Systems 2025 IT Salary Guide
The Real Math: Converting Contract to Full-Time Equivalent
The Naive Calculation (Wrong)
$90/hr × 40 hours × 52 weeks = $187,200/year
This makes contract look incredible compared to a $120K salary.
But this is wrong. Here's why:
The Real Calculation
| Factor | Contract ($90/hr) | Full-Time ($120K) |
|---|---|---|
| Gross annual | $187,200 | $120,000 |
| Vacation (3 weeks unpaid) | -$10,800 | $0 (paid) |
| Stat holidays (11 days unpaid) | -$6,336 | $0 (paid) |
| Sick days (5 unpaid) | -$3,600 | $0 (paid) |
| Health/dental insurance | -$3,600/yr | Included |
| Disability insurance | -$1,200/yr | Included |
| RRSP matching (4%) | $0 | +$4,800 |
| CPP (employer portion) | -$3,867 | Paid by employer |
| Accounting fees (INC) | -$3,500/yr | N/A |
| Incorporation costs (amortized) | -$500/yr | N/A |
| Professional liability insurance | -$1,000/yr | N/A |
| Gap between contracts | -$7,200 (est. 2 weeks/yr) | $0 |
| Adjusted annual value | ~$145,597 | ~$124,800 |
Effective hourly comparison: - Contract: $145,597 ÷ 1,880 working hours = $77.44/hr effective - Full-time: $124,800 ÷ 1,880 working hours = $66.38/hr effective
In this example, the $90/hr contract is worth about 16% more than the $120K salary—not the 56% the naive calculation suggests.
The Break-Even Formula
Rule of thumb: A contract rate needs to be approximately 1.3-1.5x the equivalent full-time hourly rate to truly be "equal" after accounting for all costs.
| Full-Time Salary | Equivalent Hourly | Break-Even Contract Rate |
|---|---|---|
| $80,000 | $38.46 | $50-58/hr |
| $100,000 | $48.08 | $62-72/hr |
| $120,000 | $57.69 | $75-87/hr |
| $150,000 | $72.12 | $94-108/hr |
| $180,000 | $86.54 | $113-130/hr |
The Hidden Costs of Contract Work
1. No Employer CPP Contribution
As an employee, your employer pays half your CPP (Canada Pension Plan). As a contractor, you pay both halves:
| Income Level | Employee CPP | Contractor CPP | Extra Cost |
|---|---|---|---|
| $68,500+ (2026 max) | $3,867 | $7,735 | $3,867 |
2. No EI Benefits (Usually)
Contractors typically don't pay into or receive Employment Insurance. This means: - No parental leave benefits - No sickness benefits - No income protection if contract ends
3. Benefits You Must Buy
| Benefit | Approximate Annual Cost |
|---|---|
| Health insurance (extended) | $1,200 - $3,600 |
| Dental insurance | $600 - $1,200 |
| Disability insurance | $1,000 - $2,400 |
| Life insurance | $300 - $1,000 |
| Professional liability | $500 - $1,500 |
4. Administrative Costs
| Expense | Annual Cost |
|---|---|
| Incorporation (one-time, amortized) | $200 - $600 |
| Annual corporate filing | $20 - $60 |
| Accounting/bookkeeping | $2,000 - $5,000 |
| Legal (contract review) | $500 - $2,000 |
| Banking fees (business account) | $120 - $360 |
5. The "Bench Time" Risk
Contractors often have gaps between contracts:
| Scenario | Annual Income Lost |
|---|---|
| 2 weeks between contracts | $7,200 (at $90/hr) |
| 4 weeks between contracts | $14,400 |
| Contract not renewed (3 months to find new) | $46,800 |
The Benefits of Contract Work
It's not all downsides. Here's why many senior developers choose contracting:
1. Higher Gross Income
At senior levels, contract rates can significantly exceed full-time equivalents:
| Full-Time Senior | Contract Senior | Difference |
|---|---|---|
| $150,000/yr | $130/hr (~$240K gross) | +60% gross |
2. Tax Advantages (Incorporated)
Incorporated contractors can: - Deduct business expenses (home office, equipment, conferences) - Pay themselves dividends (lower tax than salary in some brackets) - Defer income (leave money in corporation at lower corporate tax rate) - Split income with spouse in some cases
Important: These strategies require professional tax advice and compliance with CRA rules.
3. Flexibility
| Flexibility | Benefit |
|---|---|
| Choose your contracts | Work on interesting projects |
| Set your schedule | (Within reason—still client-dependent) |
| Take extended breaks | Between contracts, on your terms |
| Multiple income streams | Consulting, side projects |
4. Faster Rate Increases
| Scenario | Full-Time | Contract |
|---|---|---|
| Annual raise | 3-5% typical | Renegotiate at each contract |
| Market rate increase | Wait for review cycle | Immediate at next contract |
| Skill premium | Tied to band/level | Direct market rate |
When to Choose Full-Time
Full-time is likely better if you:
| Situation | Why Full-Time |
|---|---|
| Early career (0-3 years) | Need mentorship, stability to learn |
| Need work permit sponsorship | Contractors rarely get sponsored |
| Have family health needs | Employer benefits are comprehensive |
| Value stability | Mortgages, planning, peace of mind |
| Want career ladder | Promotions, titles, internal growth |
| Risk-averse | Predictable income |
The International Student/PGWP Consideration
Critical: If you're on a PGWP or need work authorization, full-time employment is almost always the right choice:
- Contracts rarely count toward "skilled work experience" for PR
- Employers won't sponsor contractors for work permits
- Self-employment hours may not count for Express Entry CEC
When to Choose Contract
Contract work is likely better if you:
| Situation | Why Contract |
|---|---|
| Senior (5+ years) | Command premium rates |
| Specialized skills (AI/ML, Cloud, Security) | Market pays more for specialists |
| Financially stable | Can handle gaps between contracts |
| Want variety | Different projects, companies |
| Tax-savvy | Can leverage incorporation benefits |
| Already have PR/citizenship | No work permit concerns |
The Tax Reality: Incorporated vs. T4
Simplified Tax Comparison (Ontario, 2026)
| Income | T4 Employee Tax | Incorporated (Salary + Dividend) |
|---|---|---|
| $100,000 | ~$27,000 (27%) | ~$24,000 (24%)* |
| $150,000 | ~$47,000 (31%) | ~$40,000 (27%)* |
| $200,000 | ~$68,000 (34%) | ~$54,000 (27%)* |
*Assumes optimal salary/dividend split and some business deductions. Actual results vary significantly.
Warning: Tax optimization requires professional advice. CRA actively audits contractors, and "personal services business" rules can eliminate tax benefits if you're essentially an employee.
Worker Misclassification: The Legal Risk
What Is Misclassification?
When a company calls you a "contractor" but treats you like an employee, you (and they) have a problem.
CRA's Tests for Employee vs. Contractor
| Factor | Employee | Contractor |
|---|---|---|
| Control | Employer controls how, when, where | You control your methods |
| Tools | Employer provides | You provide your own |
| Financial risk | None (salary guaranteed) | You bear risk of profit/loss |
| Integration | Part of the business | Independent business |
| Opportunity for profit | Fixed compensation | Can earn more by efficiency |
Source: CRA Employee vs Contractor
Red Flags
If most of these apply, you might be misclassified: - Work exclusively for one client - Use company equipment and email - Follow company's schedule and policies - Can't hire subcontractors - Have no other clients - Paid hourly/regularly like an employee
Consequences of Misclassification
| For You | For the Company |
|---|---|
| Back taxes (CPP, EI) | Back taxes + penalties |
| Denied business deductions | Employment standards violations |
| Audit attention for years | Legal liability |
Making the Decision: A Framework
Step 1: Calculate True Equivalent
Use this worksheet:
Contract rate: $___/hr
Annual gross (×2,080 hours): $_____
Subtract:
- Vacation (3 weeks × rate × 40): -$_____
- Stat holidays (11 days × rate × 8): -$_____
- Sick days (5 × rate × 8): -$_____
- Health/dental insurance: -$3,000
- Disability insurance: -$1,500
- CPP (extra employer portion): -$3,867
- Accounting fees: -$3,500
- Gap between contracts (estimate): -$_____
Adjusted annual: $_____
Divide by 1,880 hours: $___/hr effective
Step 2: Compare to Full-Time Offer
Full-time salary: $_____
+ RRSP matching (____%): +$_____
+ Estimated benefit value: +$5,000
+ Job security value: +$_____ (subjective)
Total compensation value: $_____
Divide by 1,880 hours: $___/hr effective
Step 3: Consider Non-Financial Factors
| Factor | Weight for You | Contract Score | Full-Time Score |
|---|---|---|---|
| Stability | ___/10 | Low | High |
| Flexibility | ___/10 | High | Low |
| Benefits | ___/10 | Low | High |
| Career growth | ___/10 | Medium | High |
| Income potential | ___/10 | High | Medium |
| Work variety | ___/10 | High | Low |
Negotiating Contract Rates
Research the Market
Use these resources: - Morgan McKinley Contract Salary Guide - S.i. Systems IT Salary Guide - Robert Half Salary Guide
The Rate Conversation
| What to Say | Why It Works |
|---|---|
| "Based on my research, the market rate for [role] is $X-$Y. Given my experience in [specialty], I'm targeting the higher end." | Data-driven, professional |
| "At this rate, I need to cover my own benefits, CPP, and time between contracts. The equivalent salary would be $X, which is below market." | Shows you understand the math |
| "I'm flexible on rate if there's potential for extension or conversion to full-time." | Signals long-term interest |
What's Negotiable
| Aspect | Negotiability |
|---|---|
| Hourly rate | High |
| Contract length | Medium |
| Remote vs. on-site | Medium-High |
| Notice period | Medium |
| Payment terms (Net 15 vs. Net 30) | Low-Medium |
| Expense coverage | Medium |
FAQ
Is contract work right for new grads?
Generally no. New grads benefit from mentorship, structured learning, and the stability of full-time employment. Build 3-5 years of experience first.
Can I convert from contract to full-time?
Yes, but not guaranteed. Many companies use contract-to-hire as a trial period. Ask about conversion possibilities upfront.
Do I need to incorporate?
It depends on your income level. Generally worth it if you're earning $80K+ as a contractor and have legitimate business expenses.
How do I handle the gap between contracts?
- Keep 3-6 months of expenses in savings
- Start job searching 4-6 weeks before contract ends
- Build relationships with multiple recruiters
- Consider overlapping contracts if terms allow
What about benefits for my family?
You'll need to purchase extended health insurance independently. Options include: - Manulife, Sun Life, Blue Cross individual plans - Professional association group plans - Spouse's employer plan (if applicable)
Key Takeaways
- Contract rates need to be 1.3-1.5x full-time hourly equivalent — to account for benefits, taxes, and gaps
- Full-time is usually better for early career — stability, mentorship, and growth opportunities
- Contract shines for senior specialists — higher rates, tax advantages, flexibility
- International workers should prioritize full-time — work permits and PR pathways
- Do the real math — don't compare gross contract to salary directly
- Misclassification is a real risk — understand CRA's tests
The right choice depends on your career stage, financial situation, and risk tolerance.
Related Articles: - Software Engineer Salary Canada 2026 - Salary Negotiation Guide - PGWP Job Search Guide - Canada Tech Hiring Market 2026 - Browse All Open Positions
Sources: - Morgan McKinley: 2026 Contract Salaries Canada - S.i. Systems: 2025 Canada IT Salary Guide - Levels.fyi: Software Engineer Salary Canada - PayScale: Software Engineer Salary Canada - Robert Half: 2026 Canada Salary Guide - NearSource: Contract vs. Full-Time Tech Jobs - Soni Law: T4 vs. Incorporated Contractors - Procom: Contractor Classification in Canada - Rippling: Worker Classification in Canada - Reddit: Full-time vs Contract as Software Engineer - CRA: Employee or Self-Employed