Employee Vs Contractor pay difference

I was having a conversation with our Network Admin yesterday and he suggested that when a contractor becomes an employee the benefits are generally equal to about 20% of their paycheck.

Would you guys agree with that assessment and would you say that if you are a contractor applying for a new position that you should add 20% on top of the number that you think you should be making. (eg say I’m worth 50k as a SysAdmin so I should ask for 60k if the position is a contractor) In the past I’ve usually asked for a $5/hour difference for contracting positions.

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Comments

apd123

$5 an hour seems low to me. I guess I think about it this way what number would cause me to give away my benefits and it is much higher than that.

pwjohnston

So what is your number, what are benefits worth? I'm just trying to get a consensus here.

astorrs

pwjohnston wrote: »

So what is your number, what are benefits worth? I'm just trying to get a consensus here.

Most HR depts use 30% as a standard, but obviously every companies benefits vary dramatically (especially in the US). For contracting/consulting (or other non-permanent work) the easiest way to figure out what you're worth per hour (or at least what you need to be worth) at it is by calculating backwards...

http://www.cvac.ca/templates/Price%20your%20service.pdf

blargoe

I've always heard 30%, actually my company uses 35%

darkerosxx

astorrs wrote: »

Most HR depts use 30% as a standard, but obviously every companies benefits vary dramatically (especially in the US). For contracting/consulting (or other non-permanent work) the easiest way to figure out what you're worth per hour (or at least what you need to be worth) at it is by calculating backwards...

http://www.cvac.ca/templates/Price%20your%20service.pdf

Cool doc, thanks astorrs.

Ashenwelt

Um, the taxes you take out for paying the govt. at the end of the year could be around 25% and you don't get benefits. So, 35% is a good start. But it is all about what you can get out of it really. Sometimes, just that 25% is worth it, sometimes you want 50%. I know, once I came back from getting laid off and I chraged 400%. But on average, 47.5% is about what I chrage new clients off what I would be making on a per hour basis.

YMMV.

pwjohnston

darkerosxx wrote: »

Cool doc, thanks astorrs.

Yes, that was very helpful, thanks for posting that.

pwjohnston

Ashenwelt wrote: »

But on average, 47.5% is about what I chrage new clients off what I would be making on a per hour basis.

Just to be clear, the position I'm in now and the type of jobs I'm talking about are the ones were you are essentially an employee, but they pay you as a contractor.

You know the types where the *contract* was only supposed to last 3 months and then you were supposed to be covered to an employee, but now you are going on 8 months. . . . . .

Personally I'm afraid that they'll think that since the economy is **** that if the do decide to make me an employee than they'll think they can reduce my pay . . . . . because of benefits. In which that case I'd say just give me the money.

I love how some of these companies think it's fair to treat you as an employee and pay you like a contractor. Over 50 or 60k I can see where it starts to be a benefit, but below 50k they're just screwing people.

Ashenwelt

pwjohnston wrote: »

Just to be clear, the position I'm in now and the type of jobs I'm talking about are the ones were you are essentially an employee, but they pay you as a contractor.

You know the types where the *contract* was only supposed to last 3 months and then you were supposed to be covered to an employee, but now you are going on 8 months. . . . . .

Personally I'm afraid that they'll think that since the economy is **** that if the do decide to make me an employee than they'll think they can reduce my pay . . . . . because of benefits. In which that case I'd say just give me the money.

I love how some of these companies think it's fair to treat you as an employee and pay you like a contractor. Over 50 or 60k I can see where it starts to be a benefit, but below 50k they're just screwing people.

The key is W2 vs 1099 in the USA. 1099, you have to pay your taxes. It isn't uncommon for someone to under bid and end up making less than minimun wages because they forgot the taxes. That number was based on 1099. If you are a W2, the 20% is a good starting place... but if you are paying the taxes via 1099, then a 20% means you are getting paid less than you really think. And ofr the record, I have been offered the temp to perm jobs... starting as a 1099 contractor. It does happen... often.

So for you 20%... it doesn't work with 1099. Lets say you are taking a job that would normally pay $20 per hour. You think, add 20%, you you charge $24 per hour. Now you are thinking you have $4 per hour for benefits. In reality, you are getting $16 per hour after self employment taxes (aka contractor taxes), so if you are budgeting $4 per hour for benefits, your net pay just became $12 per hour.

Now say you take the amount as 47.5%. For a $20 per hour job, you are billing $29.5. Minus the taxes, and you are at $22.125, take the $4 for benefits and you are still, slightly below that $20 per hour job at $18.125 per hour.

To net that $20 per hour at $20 per hour... it takes a 60% markup.

When contracting, you need to be very careful. And with the number of 1099 jobs that keep calling me and offering normal wages... I am thinking a lot of people are going to be getting caught in a trap.

Also, be aware that each state decides what a contractor is.

exx1976

Ashenwelt wrote: »

The key is W2 vs 1099 in the USA. 1099, you have to pay your taxes. It isn't uncommon for someone to under bid and end up making less than minimun wages because they forgot the taxes. That number was based on 1099. If you are a W2, the 20% is a good starting place... but if you are paying the taxes via 1099, then a 20% means you are getting paid less than you really think. And ofr the record, I have been offered the temp to perm jobs... starting as a 1099 contractor. It does happen... often.

So for you 20%... it doesn't work with 1099. Lets say you are taking a job that would normally pay $20 per hour. You think, add 20%, you you charge $24 per hour. Now you are thinking you have $4 per hour for benefits. In reality, you are getting $16 per hour after self employment taxes (aka contractor taxes), so if you are budgeting $4 per hour for benefits, your net pay just became $12 per hour.

Now say you take the amount as 47.5%. For a $20 per hour job, you are billing $29.5. Minus the taxes, and you are at $22.125, take the $4 for benefits and you are still, slightly below that $20 per hour job at $18.125 per hour.

To net that $20 per hour at $20 per hour... it takes a 60% markup.

When contracting, you need to be very careful. And with the number of 1099 jobs that keep calling me and offering normal wages... I am thinking a lot of people are going to be getting caught in a trap.

Also, be aware that each state decides what a contractor is.

Indeed. If anyone calls me for a contract, my first question is W2 or 1099. W2 I charge $75/hr for short-term contract, 1099 is $125. And by short-term, I mean less than 40 hours (eg, a job I can do on a week's vacation from my regular job). If it were to be something that was long-ish term (12 months or more, eg - something I would "switch jobs" to do) then the rate is $60/$100.

Also, if you're looking at contract work, be sure to ask about per-diem. Contracts shorter than 12 months in duration (and I mean 12 months TO THE DAY), per-diem is tax-exempt. So you could easily be looking at $35/hr 1099, but then an additional $16/hr per-diem. It works out to be a lot more than you think. BUT - if you go to 12 months or beyond, then the per-diem becomes taxable income, and you're screwed. Bad.

bellhead

If you go 1099 here is what you need to look at..

1.) You pay all taxes, which include federal and state taxes on a 3 month.
2.) Social Security @ a 15% rate if I am correct.
3.) Health care out of your pocket. This is around 10 to 12k a year.
4.) Retirement you are gonna want to set aside at least 5k for this also.
5.) Medicaid and medicare at around 2.25%
6.) Any and all local city taxes.

Add these together and you have a roughly 35% over head if not more

rAllcorn

In contracting my experience has been (for about 17 years) that you make anywhere from 50%-100% more! You have to take into account that you are NOT paid for your time off or vacation, and you are NOT paid for health benefits. Often, you have to provide your own training, tools and equipment.

My experience has been, since 9-1-1, that many recruiters are trying to sell contractors on the idea of going W-2. While this puts you in the "Employee Status" as far as the IRS is concerned, you by no means are an employee! You do not get PAID time-off or vacation, and while they may offer you health benefits, they are by no means competitive to full-time employment benefits. This is just an attempt to "cut you short" on your pay. THE MORE THEY KEEP, the more they make! $$$

I have, on several occassions, actually "seen" the paperwork for my contracting hire!! Strange fluke I know, but the individual who had to approve these just left it on their desk and it happened to catch my eye! (maybe because it had my name on it, not sure why) I noticed in every case that I was "bringing home" for my wage, exactly "half" of what they were charging these companies that I was working for!

So, with all due respects, it should be a "two-for-one" deal. If you are working in a position where the regular employee is being paid $25 dollars an hour, then you should be receiving $50 dollars an hour. Let's face it ... "he" is working regular, 40hrs per week, 52 weeks per year. YOU, on the other hand, are only there for a few months at best! NOW you see why contractors get more!

So, the next time you get offered a really "LOW" salary rate, with a W-2 (like that adds appeal to the job) ...
"Tell them, so ... you really want me to work for $ (quote 1/2 of what they offered you)"?

Watch them squirm! In many cases, they "know" they are cheating you out ... but you're going to find that in most cases, these recruiters are green! They've been at their job less than 6 months, and with little or no training apparently.

pwjohnston wrote: »

I was having a conversation with our Network Admin yesterday and he suggested that when a contractor becomes an employee the benefits are generally equal to about 20% of their paycheck.

Would you guys agree with that assessment and would you say that if you are a contractor applying for a new position that you should add 20% on top of the number that you think you should be making. (eg say I’m worth 50k as a SysAdmin so I should ask for 60k if the position is a contractor) In the past I’ve usually asked for a $5/hour difference for contracting positions.

rAllcorn

Loved the advice on per-diem ... I hadn't considered that one.

Here's something you might want to consider:

You said, "If anyone calls me for a contract, my first question is W2 or 1099. W2 I charge $75/hr for short-term contract, 1099 is $125."

Now if I understand you correctly, you WANT to get paid less on a W-2 job? Because after they take your withholdings out of that $75/hr you're not going to even have that much in comparison. With a 1099, you take home $125/hr, but you'll have to set aside for your taxes, withholdings, etc. for later. BUT, if you have them take that out for you, at $75/hr your income will even been less than if you'd worked 1099.

Not sure about that choice ...

The reason a company insists on W-2 is because they are afraid that the IRS will consider you an "employee" rather an a contractor. The longer you work for them, the more they are concerned about this. Additionally, they somehow seem to feel more "justified" in cheating you out of your due salary, and charge you much less than you would make on a 1099.

The Austin Texas area is, in my experience, probably the worst in this area ...

rAllcorn

Just wanted to clarify something:

On a 1099, after you set aside what you need for your taxes, and for vacation, etc. you still are going to come out ahead in comparison to the $75/hr on W-2. By the time they strip away with withholdings from that, you're down to almost half of what you'd take home on a 1099.

Also, keep in mind that you can reclaim even more in your profits if you record and keep track of deductable items. These REALLY can save you $$$.

mdcheese

Very good insights, appreciate the back and forth. Always laughed when company would pay outrageous contractor fees when we could do in house, but just did not have the time. I bet there are some good tax benefits that a company can take versus doing the same work in house, even if they pay more. Thanks