Let's do some billing!
February 28, 2007 2:26 PM   Subscribe

Help me figure out how to compare employee pay/benefits with self-employed pay/benefits? Math may be required. Please show your work. Start... now:

I'm looking at two jobs.

One is as a regular employee for a large software company, where my salary would be ~100K and I would have full benefits: complete medical, mediocre dental, 3 weeks paid vacation, matching 401K up to about 4.5%.

In the other, I would be a "contractor" of sorts - in fact, I'd be a self-employed vendor. I would have to pay self-employment taxes/my own social security, make my own health insurance arrangements, etc.

The second job would only last about 8 months, and then I'd very likely proceed to the first job. I'm sort of doing the second job as a favor to a smaller software company that temporarily needs a hand.

How do I determine how much I will need to bill hourly in the second job to roughly match the income I would be missing by not taking the first job immediately?
posted by Cardinal Fang! to Work & Money (12 answers total) 7 users marked this as a favorite
I'm self-employed myself, but on a very different scale, so I'm not sure how relevant my experience will. Nevertheless...

I divert thirty percent of my pay checks to my 'taxes only' savings account. I can't afford insurance, but I know this because I looked into it. To get a policy that I felt good about was about two hundred a month. (there are about a gazillion options in this arena though, so I would suggest you look at a couple of health insurance websites to see what's available. I used Blue Cross as my baseline) Pension contributions are a little trickier to calculate, but you should be able to ballpark it with the numbers you presented above. Vacation? As a self employed person, you don't get vacation. No work, no pay. Very simple.

If I were in your shoes, I would take the permanent position without hesitation. In fact, I just did something similar earlier today!
posted by schwap23 at 3:03 PM on February 28, 2007

Added data:
- this would be in the state of Washington
- although I referenced some things, I don't actually know what all goes into being self-employed (taxes, soc sec payments, etc), so please, if you actually do know, please speak up

I'd like to help the smaller company, but I don't want lose too much of what I would have been paid at the bigger one.
posted by Cardinal Fang! at 3:05 PM on February 28, 2007

schwap23, I will eventually take the permanent job. However, I don't mind helping the smaller company for a while as long as I don't lose (much) money during that period. So, I need to calculate how much to bill them, to get the same net benefit I would with the 100K salary and bennies...
posted by Cardinal Fang! at 3:08 PM on February 28, 2007

I run a website on consulting. One of the most popular posts is about how to set fees. You can find the link in my profile, unless someone wants me to post it here.

However, you're asking about an ongoing position. In that case, you might want to change the calculations slightly. You could reduce the amount of downtime and administration, since, in theory, you would be full-time and wouldn't need to be marketing yourself or doing so much handholding for the client.

You may also want to consider whether you could legally be an independent contractor. I've got a post on that, which I can dig up. But that wasn't what you were asking.
posted by acoutu at 3:16 PM on February 28, 2007

Self employment tax is somewhere around 20% of your income after deductions. Also, if you're making the kind of money you seem to be hinting at (around 100k) you'll most likely have to pay estimated taxes quarterly. Here's a link to what the IRS has to say about estimated taxes. Being an independent contractor is really really a pain unless you diligently put 20% of your paycheck into a savings account for when tax time comes around.
posted by blueskiesinside at 3:28 PM on February 28, 2007

acoutu, thanks, I'll look at the link. About the second thing: I'm open to pretty much any contract they want to make. They are incorporated in WA. What options do they have?

I'm not above contracting through one of the local contracting vendors (Volt, etc). In fact, it might be easier, since they handle soc security payments and offer health insurance. They do take a cut, though...
posted by Cardinal Fang! at 3:37 PM on February 28, 2007

I have no problem posting this link - it's a great article that speaks directly to my question, and I'd like to discuss it:


And we just happen to have the author on hand!

This article suggests a rule of thirds, whereby you take you your hourly rate as an employee, and double or triple it, to take care of various overheads. You mention: "Some consultants choose a triple rate because of what they call the rule of thirds -- one third goes to your real wage, one third to expenses, and one third to administration, low utilization and bad debt."

I think I can directly apply this, carving off the pieces that don't really apply. But I don't see a direct mention of self-employment tax/social security payments. Are you including that in the third you have allocated to 'expenses' ?
posted by Cardinal Fang! at 4:06 PM on February 28, 2007

I've done quite a bit of both.

So math work wise, your 100K salary breaks down into an hourly wage like so 100000/52 weeks/40 hours = ~$48.

So $48 is what you need to make after everything. Add in 20% for self-employment tax stuff. I'm increasing to 25% to adjust for the fact that you're billing more based on hourly wage + tax + expenses (.25*48) + 48 = $60.

Independent contractors get no medical, or vacation, or 401K, etc. When I was independent, medical was $600-800 a month for a family of four, and it was pretty piss poor medical. Add in a dental discount plan (I could never find a viable dental insurance plan) at about $50. Add in one and half days off a month (sick, vacation, etc) (8*1.5*60)= $720. Add in 4.5% 401K matching funds at 100K is $375 a month. And we'll ball park the total figure to $1800 a month for benefits. Now add in the major holidays (9) (Memorial Day, July 4th, Labor Day, Thanksgiving, day after Thanksgiving, Christmas Eve+day,New Years Eve+day) at $480 a day. (9*480) + (12*1800) = $25,920, amortized over a year of work (25920/52/40) = ~$12

So our new figure is $72 a month. Let's adjust for days off. We're assuming 52 weeks at 40 hours a week is our base. 52*40 = 2080 originally planned working hours. With holiday and vacation of 27 days at 8 hrs a day this breaks down to 1864 actual working hours per year. So calculating effective wage is (72*2080/1864) = ~$82.

Now following the rule of thirds would be:
r=Desired Rate
r+ (.33r) + (.33r) = 48 + 16 + 16 = $80

So right around what the calculations showed.

Having said all that, independent contracting is a headache. Always having to do something that's not really work related, but just related to the fact that you're self-employed.
posted by patrickje at 4:55 PM on February 28, 2007 [1 favorite]

All right! Showing the work!

Using the calculations on acoutu's article, I calculated higher. I figure 100K salary plus bennies was worth about 120K; I used his figure of 1920 hours a year, and came out to about ~$69 an hour as my starting point.

By the end I was estimating I'd need to bill at least $100 an hour to match what I'd be postponing. I wasn't using the full rule of thirds, as I would not have most of those costs.

Of course, I'd be risking possibly not getting that first job again once this contract was over (nothing in life is gauranteed), so maybe I'm being too generous.
posted by Cardinal Fang! at 5:46 PM on February 28, 2007

I noted that some people use the rule of thirds, but others just use double their regular hourly rate. So it's okay if you're not billing triple what you'd usually make.

Try using the section of my post called "Setting consultant fees strategically using real-life data". The rule of thirds doesn't always work out. It's nice to try a few strategies, so you can take an average.

I include social security and self-employment taxes as expenses/benefits for which you much account. You might cut some slack here if you have a spouse who provides medical benefit coverage, but I wouldn't negate those benefits even then. They're still worth something.

BTW, acoutu is a she. :)
posted by acoutu at 6:51 PM on February 28, 2007

Whoops! Sorry. I originally thought "she", but then I saw the spelling of the name on your website, with the accent, and switched back to masculine. Not that I have any idea what I'm doing...
posted by Cardinal Fang! at 8:26 PM on February 28, 2007

Somewhat off topic, but a couple things about your original post jumped out at me:

The second job would only last about 8 months, and then I'd very likely proceed to the first job. and How do I determine how much I will need to bill hourly in the second job to roughly match the income I would be missing by not taking the first job immediately?

Are they really going to keep the permanent position open for at least 8 months for you? I think you're making a HUGE assumption about getting the perm job once the temp contract is over. I have a hard time believing that the company will wait that long once they have the req and find someone to do the job. In a lot of companies, if you don't fill the requisition, you lose the headcount.

That said, I'd go for the permanent position: 8 months is a long time to do someone a favor. Perhaps you could work for the smaller company on a PT consulting basis while you have a FT gig.
posted by sfkiddo at 8:37 PM on February 28, 2007

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