How To- Calculate Your Hourly Rate as an Independent Contractor

This is something that is not discussed very often and can, unfortunately, be a big unpleasant surprise at tax time.

You have an offer to do a job as an independent contractor (IC). In the USA, this could also be a 1099 position (named for the tax form you will receive at the end of the calendar year).

The hiring company gives you what sounds like a great wage.

But, what is the bottom line?

Note: these are US-based figures, but a quick google search can help you find the numbers in your country.

As an IC, you will not have an employer to pay part or all of your payroll taxes or insurances. This includes: Social Security (6.2% each for employer and employee), Medicaid (1.45% each for employer and employee), State Unemployment Taxes (SUTA), long-term disability, short-term disability, and workers comp. Some employers also offer employer-sponsored life insurance, retirement plan contribution matches, subsidies for health and dental insurance, vacation, sick time, and paid holidays.

When these are added (except vacation/sick/holidays), they are considered “fringe” payroll expenses. The average basic fringe rate is 30%. That could vary widely depending on the employee’s salary and which health plan option they choose. I have seen fringe rates as low as 8% if the employee does not take advantage of employer-sponsored insurances, and as high as more than 100% if the employee does not make very much but has a family health insurance plan.

As an IC you do not get any of these. Additionally, you will have to obtain some kind of liability insurance in case you do any damage.

And, what happens if you cannot afford to pay all of these insurances (which, by the way, tend to be much less expensive for employers than for individuals)? If something happens, you may find yourself unable to work, without an income, and with some very expensive bills.

Employers provide a lot of equipment and office space for their employees. ICs are not entitled to any of this. Some employers will provide it, but it is not recommended because doing so could cause the Department of Labor to consider the position employee instead of IC.

On the upside, as an IC you set your hours and have much more freedom, assuming you do what you agreed to do and meet the deadlines.
So, how do you calculate your hourly rate?

Start with what you will be paid. Let’s say this $100 per week.

Now figure out how many hours you believe it will take you to do the job (ie: 10 hours).

Divide the rate by the hours ($100 / 10 hours = $10/hour GROSS).

Next, subtract your payroll and income taxes. 30% is the standard, but use your actual if you know it ($10 X 30% = $3) ps- make sure you actually move this amount to a separate account and DO NOT TOUCH IT until tax time.

This leaves you will an after-tax hourly rate of $7 ($10/hour – $3/hour for taxes = $7).

You could also subtract a pro-rata share of your other expenses- equipment, liability or professional insurances, uniforms, or anything else that would be provided by an employer if you were an employee. To calculate this amount, divide the monthly or annual expense by the hours you expect to work during that time period.

Note: if you have your actual hours and expenses, please use those. I used estimates because many people reading this are just starting out and will not know their specific numbers.

Now, for the sobering truth. Many times the “true” hourly rate will be much less exciting than the gross rate you were told you would be paid.

SECRET: the rule of thumb for employers is to pay ICs twice what the hourly rate would be for employees. So, if your calculated hourly rate is not at least double what you would earn if you were hired as an employee, you are being taken advantage of.

Depending on the length and amount of your contract it may be worth the money to have an attorney specializing in contract law review it. Many of these contracts are heavily skewed in the employer’s favor.

One last thing to keep in mind: read your contract carefully. As far as the law is concerned, the contract is the only thing that counts. The employer may have told you things, so make sure you get it in writing. You could create an addendum to the contract stating what was verbally told you and get the employer to sign it. At least you then you will be covered.

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