So you want to be a contractor? Use our Calculator to Determine Your Rate!

As more and more companies look to hire contractors instead of full time employees to get work done you may find yourself considering a contracting gig for the first time in your career. A recent study suggests that by 2020, 40 percent of America’s workforce will be contract, temporary or self-employed workers.

Many people may shy away from contracting jobs because they often do not offer paid time off or benefits. However, you can receive a much higher hourly rate on a contracting job then you would on a fulltime job. The benefits and paid time off are not FREE and your fulltime employer will pay a lower salary to cover those things.

You can successfully build benefits and paid time off into your contracting rate and feel comfortable that your contracting gig will be at least equivalent to a fulltime salary plus benefits.

Finding your hourly rate

Alice is a full stack developer who has just left a fulltime position where she was making 150K with 2 weeks vacation, medical benefits, 401K. She wants to figure out what her equivalent hourly rate would be as a contractor.

First she should take her 150K salary and divide that by the number of hours she plans to work in the year. There are 40 hours per week and 52 weeks per year so a full year with no time off would have 40×52 =2080 hours. Since Alice wants to take off 2 weeks for vacation and an additional 10 days for holidays she should reduce the yearly hours by 20 days * 8 hours/day = 160 hours. So her hours per year will be 1920.

Taking her $150,000 and dividing it by the 1920 hours gives her an hourly rate of $78/hour.

1099 or your own Corporation vs. W2

Before determining her rate Alice must know if she will be a 1099 contractor or work on the w2 of a staffing agency. The difference being that as a W2 employee the employer will withhold taxes and pay employer taxes. As a 1099 contractor or if you are working under your own corporation you will need to account for these employer taxes which will be approximately 15%.

Adjustments for Benefits

  • Add $7K – Alice is single and health insurance will cost her 7K per year
  • Add $11,475K (7.65%) for the extra tax Alice will pay for self employment. This is what her employer used to pay the Government (Employer Taxes). If Alice’s contracting position is with a staffing company on a W2 then this does not need to be added.
  • Add for 401k matching – $6K
  • Total addback for benefits and taxes for Alice equal $24,475, ($24,475/1920 hours = ~$13 dollars per hour.)
  • Alice’s Rate goes up to $78/hr+$13/hr= $91/hr on 1099
  • If Alice were a w2 staffing employee she can remove the additional self employment tax number so her total add on would be 13K/1920 hours = ~7/hour, so w2 staffing rate will be 78/hour + 7/hour = $85/hour w2 staffing rate

Adjust for Downtime

There may be downtime in contracting so Alice should adjust her rate to account for fluctuations in your projects. If we assume Alice will be spending about 3 months per year finding clients/off a project her utilization rate will be 80%.

Adjusting- $91/hr/0.8 = $114/hr on 1099

We have put together a calculator you can use here to calculate your personal hourly rate.

This is a great exercise to come up with a target hourly rate that you can use to start negotiations with a client. You can generally lower your rate for longer term contracts as your utilization rate will increase.  Ultimately you will need to test your rate out on the market and negotiate, negotiate, negotiate.

 

Written by 

As COO, Katie Delgado is responsible for running Crossfire's entire staffing arm. She loves nothing more than connecting talented people with fulfilling jobs. She has a passion for helping women in technology advance their careers. In her free time she is involved in helping develop early stage biotechnology.

6 thoughts on “So you want to be a contractor? Use our Calculator to Determine Your Rate!

  1. Great insight to contract work. I am just beginning my own self employment, and this blog was the first step in understanding all the hidden expenses of moving from a salary to contract work. Thank you!

  2. Katie – my name is Mike Benoit. I am considering making the jump to self employment in the consulting world. Your calculator is wonderful! Thank you. One question… I will travel for my position, I do need to confirm whether travel will be expensed, or needs to be blended into my rate. To blend, is it as simple as adding that as a line to the Benefits and Taxes calculation, expected monthly expenses * 12?

    Thank you again!

    Mike

    1. Hi Mike!
      Sorry I just saw this comment, glad you are enjoying the calculator. Yes if you are traveling make sure to check if they will reimburse for this or if they want you to come up with an all inclusive rate to cover this. I would figure out your costs monthly and add it that way. Best of luck to you!

  3. I think it is mainly small businesses that will hire an independent contractor as an individual. Many small businesses do not offer health insurance or 401 k plans anyway. It is the large scale businesses that have more rules regarding offering health insurance and other benefits. Those companies may hire contractors, but it will most likely be through a contracting service company/temp agency that would offer benefits. So I think as a comparison of w2 pay vs 1099 pay it should not include health insurance or 401k calculations. Those would be on you anyway. The only difference will be on taxes….such as self-employment tax, deductions you can take as a business, Medicare/ss taxes and alike. Also, a factor are things like remote work without the commute be it your own car or transit and/or life-work balance. A w2 position will require different things than a 1099 position.

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