How to figure out what to charge for 1099 work?

March 29, 2012 9:14 AM

How to figure a contract rate for 1099 work?

I've recently moved onto a new job. Part of my old job was doing the bookkeeping for some properties the owner owned - maybe 6ish hours a month. They have now asked me if I'm willing to keep doing this bookkeeping, but on a 1099 basis.

The hourly rate I would like to receive if paid through payroll is $30/hour. However, if they're 1099ing me, a bunch of that will potentially go to taxes.

How much more should I ask for if they're paying me as a 1099 employee? I've heard to put aside 30-40% for taxes, but is there a way to plug in my other numbers somewhere, and find out approximately what my tax liability will be? Or should I simply say "$45/hour if I'm a 1099 employee"?

posted by needlegrrl to work & money (10 answers total)

While it's not perfect, Freelanceswitch's hourly rate calculator is pretty comprehensive.

I wouldn't do it for anything less than double what you would want if it was W2 work. I'd ask for $75/hour, negotiate, and be willing to walk away for anything less than $60/hour.
posted by ndfine at 9:19 AM on March 29, 2012 [2 favorites]

You want to make it worth your while. I've heard that something like a 50% markup is reasonable to allow for taxes. If you've got another full-time job, though, then this is something that will eat into your after-work time, which is (I'm assuming) scarce and has value to you. So pick a dollar figure that will leave you happy to do the work: that's your take-home. Add 50% to that for taxes. If you are at all worried about about whether you are pricing yourself out of the job, you're probably not.
posted by gauche at 9:19 AM on March 29, 2012

I agree with ndfine. You'll lose money @ $45/hr because the taxes on 1099ing are horrendous (although a good accountant helps a GREAT deal--I love mine) AND you have to deal with your own benefits and expenses.
posted by smirkette at 9:29 AM on March 29, 2012

The most important thing to keep in mind during this process is what Metafilter's own Anil Dash has to say on the matter:

I talk to a lot of consultants, freelancers, and small businesses who do web work, and I used to be a freelancer myself, so sometimes I get asked for advice on how to price one's goods and services.

I think I came up with my best suggestion today, and it involves only two simple steps:

• Slap the client in face.
• Tell the client your hourly rate.

If the person looked more shocked, horrified, offended, hurt, saddened, or wounded by the slap in the face, then you are still pricing yourself too low.

Your mileage my vary, this is not to be construed as legal advice, eye-poking may be substituted for slapping in some states.

Seriously.
posted by jeb at 9:36 AM on March 29, 2012

I'm afraid I might be wrong, but ... isn't it as simple as figuring out what your marginal tax rate is, then doing a little multiplication? If your marginal rate is 25%, and you want to earn $30/hour, charge $40 an hour.
posted by troywestfield at 10:20 AM on March 29, 2012

At least double your salary rate pro-rated by hour. So $60/hr; more if you think you can get it. It's not just taxes, it's benefits. Your 1099 work doesn't include health insurance, or retirement, or unemployment benefits, or a steady job, or anything else that generally goes with a full time white collar job. If this is a supplemental thing you'd be doing on top of a full time job maybe you don't need to go that far.
posted by Nelson at 10:28 AM on March 29, 2012 [1 favorite]

isn't it as simple as figuring out what your marginal tax rate is, then doing a little multiplication?

It's not this simple. There are taxes other than your income tax, some of them at the state level, some of them at the federal. Some of them you were only covering half of before, because you were an employee. Now you'll be responsible for all of them.

Especially the first time out, you might not think of them all. Better you build some slack into your estimate.
posted by gauche at 10:33 AM on March 29, 2012

First: A 1099 contractor owes the same payroll taxes on their wages are are taken out of a normal paycheck. The only difference is the check you clients give you won't have any of these taken out. You'll be paying these all when you do your taxes. These taxes are rough estimates based on a guess at what your marginal tax rate will be. So figure out your tax brackets (both federal and state) and do some maths.

Second, a 1099 contractor — as a self employee — also needs to pay the employer half of the social security and medicare taxes. When you're a W2 employee, about 7.5 percent of your check is set aside for social security taxes, and your employer also matches that 7.5 percent. When you're self employed you owe both halfs. More maths.

So that's the extra taxes you'll owe. If you're lazy the golden rule of "pretend 33% of that money isn't yours" will usually steer you well, and give you a small bit of money left at the end of the year. As an aside, it's worth getting an accountant the first year you do 1099 work.

The other thing to consider are those mysterious "market rates". Your employer **could** go to an outside book-keeping agency, but they'd rather not. It might mean changing their accounting setup, or teaching a new bookkeeper about their business. You're a known thing. That is, they know you can do this work without screwing up or causing an issue down the line. That has value. Do some research as to what a local bookkeeper would cost them, and then tack on an extra $10 - $15 an hour on top of that and see what happens.
posted by alan at 10:42 AM on March 29, 2012

Question that might be relevant: are you working for the same employer in general, just in a different department, or a whole other employer?

Anyway, the reason taxes seem higher on 1099 work is for two reasons:

1- it is "extra" money that is added to your other salary at your top marginal rate, just like a second job might be. Whereas your "first" job seems to have lower taxes because part of your salary is taxed at the lower tax brackets.

2- For w-2 work, part of the taxes you pay is hidden. IE, the above mentioned social security and medicare taxes. Your employer just pays it for you.

If you are figuring that you want to make the equivalent of $30 an hour W2, then you need to add another 6.2% for social security and another 1.45% for medicare. The regular income tax is already accounted for, since it is the same between W2 income and 1099 income.
posted by gjc at 3:54 PM on March 29, 2012

This really varies by state and municipality. As an independent contractor who's a resident of Portland, Ore., my federal, state and local taxes add up to about 40% on the first $35,350 I make, and 50% above that. If I ever get over $50,000, I start having to pay a municipal business tax that I'm exempt from now, which I haven't even figured out yet.

The rule of thumb I usually hear is that you should set a floor of double what you'd like to make per hour. So if you want to make $30/hour, charge $60/hour or more.

I've only been doing this for a few months, but at present I'm paying myself half of all my freelance earnings and keeping the other half in my business bank account. Whatever doesn't ultimately go to taxes I'll use to reinvest in my business, or maybe to give myself a small bonus once I file with the IRS.
posted by croutonsupafreak at 4:33 PM on March 29, 2012