Compensation

How do I figure out the best 1099 salary for myself?

Anonymous

September 7th, 2013

I'm a software engineer. I know exactly what my salary range is for "regular" full-time employment. However, I'm currently considering an offer at an awesome company with the catch that I'd be hired as an independent contractor on a 1099, which, of course, means no real benefits (including health insurance), no vacation, and that I have to take care of my taxes on my own. The team is distributed, so I'd be working from home, but, ideally, I'd get myself some desk space in some type of co-working environment.

My question for you smart individuals is what exactly is the formula to figuring out the best 1099 salary for myself based on my "regular" salary range?

Much thanks in advance!

- Jonathan

Jonathan Vanasco

September 8th, 2013

Odd, here's the copy from my outbox
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One general formula is that FT employment is at a target of 2000 work hours; and 1099 workers have 1000 billable hours (the difference is in non-billable hours, vacation, admin overhead, etc ). That's probably the most prevalent one I know. 

Other formulas take that range and factor in the costs of healthcare, etc; or model in admin/ office overhead, taxes, unemployment, etc.
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To chime in on what a few others said, the 1.2-1.5X range only accounts for your hourly personal "cost" and "overhead".  It's an employer-friendly way of calculating the rate.  It doesn't take into account non-billable hours : admin overhead (CPA, benefits coordinator, etc), professional development, conferences, business expenses, new business / lead generation, etc.   

As a self-employed person, you're also subject to significantly higher costs for many of the core goods and services than the volume-discounts businesses get ( for example: in NYS a particular health-insurance plan might cost $1500/month for a self-employed person, but the group-rate an employer would get for the same plan is $400).

Quick example from the reverse perspective is If you're running a services oriented company (ad agency, devshop, etc)  - you might target employees at 2000 hours a year -- but that will generally only correlate to around 1300 "billable" hours ( where they're directly working on client work ).  The other 700 hours?  New business, internal projects / admin /maintenance, r&d, staff meetings, etc.  It all adds up.  Agencies will typically set billout rates somewhere between 2&3x employee hourly wage -- someone making $100k/yr will bill out at $300/hr.  The extra income goes to offset non-billable hours, overhead costs (office, etc) and then the company's profit.

You're fine using 2000hours as long as they treat you like a real employee and you're okay with undervaluing yourself -- but the second your contract is up, you'll quickly dive into the red as your rate doesn't cover periods of unemployment.  you need to treat your 1099 status as if you're a business -- because you are. 

In NYC/LA/SF, the "general" rate is salary/1000 hours.  people will often base their rate on 800-1000hours; and discount up to the 1000-1200 range for long-term contracts.   for added context, dev shops typically charge $200-300/hr for jr-mid range programmers in these markets ; companies that offshore charge $50-150/hr.  

Monique Barbanson CEO and Founder at 3PM Revolution

September 7th, 2013

If you work full time that's 2000 hours a year. So by dividing by 1000 you are saying that you need to double your hourly rate if you work as a 1099 vs a W2, to cover ss tax, health care and time spent finding your next customer. Best,

Monique

Jake Carlson Software Development Manager at Oracle

September 7th, 2013

Duane, since you say you already know your salary range for regular W2 employment, I agree that a formula can be applied to ascertain a 1099 equivalent. If you do a search for the total cost of an employee, you'll get a figure somewhere in the neighborhood of 18-26% of the base salary for the cost of benefits.

You should also take into account the fact that you do not get paid vacation, holiday, and sick time. To make it easy, let's say an employer should expect that a salaried employee would get 4 weeks out of the entire year for vacation / holiday / sick time (out of 52). 4 is about 7.7% of 52.

Also think about what equipment and services you will need to provide yourself. If they do not provide a reasonable work space for you, factor in how much such a space will cost you. If they will not provide your work machine, factor that in as well. If they require you to have an internet connection and don't provide it, add that. If they require you to call in but don't provide you with a phone and/or don't pay for yours, add in some percentage of those services.

So as a baseline, you should be looking for around 1.25 to 1.5 times the base W2 salary plus the cost of whatever they will not provide you in order for you to do your work for them. Divide that number by 2,080 (the number work hours in a year if you work 40 hours a week), and you'll get a bare minimum reasonable hourly rate if it is a full time gig. If it is less than full-time, I'd tack on at least another 25% (if not more).

If it is a full time gig, then the employer will likely expect a 'volume discount' such that they would not spend more on you than they would a regular salaried employee (approximately the above formula). However, if this is a part-time gig, you really need to charge more per hour than the above calculation. If you only work for them part-time, then I would treat yourself more as a company providing services to a client. You must account for your overhead and expenses as a company - for example, the cost of finding other work, etc.

There are other less tangible aspects of contracting vs. employment. There are usually 3 reasons why the employer might opt for this arrangement:

1) It is contract-to-hire, meaning they want to test you out before fully committing;

2) They don't know how long they need you or know they will only need you for a short time, and therefore it doesn't make sense to bring you on board as an employee;

3) They aren't organized or big enough to deal with having an actual employee.

I would try to figure out which of these (or another I haven't thought of) is the case and price / plan accordingly. 

I own a contracting company that charges an hourly rate that is about double the regular W2 salary of someone that does the kinds of work I do annually. However, this accounts for the fact that I only ever work for another company part-time and have overhead of equipment, utilities, and the cost of managing the business, and the cost of finding new business to fill the rest of my time. If yours is a full-time gig, I doubt that the employer will go for double the salaried amount, but 1.5+ may be reasonable.

Pavel Karoukin I Fix Problems

September 7th, 2013

take your regular salary, multiply by two and adjust it based on number of hours you are expected to dedicate to it.

Monique Barbanson CEO and Founder at 3PM Revolution

September 7th, 2013

Take your Full time salary and divide by 1000 to get your hourly rate.

Anonymous

September 7th, 2013

@ Jake Carlson:

Thank you so much for the detailed response.

This is the reason why being a part of this network is priceless :) .

Thanks again!

- Jonathan

Greg Thatcher Software Engineer at ThinAir Labs

September 8th, 2013

I believe it used to be called the "rule of 2000". Let's say your previous salary was $100,000.00 Divide this by 2000 (40 hours per week * 50 weeks of work) = $50 per hour However, your previous employer was paying part of your Social Security/Disability taxes (~7.5%) plus insurance and other benefits, so you might want to add an additional %15-%30 to your hourly rate (some even double the rate). It will be very important to keep track of expenses for supplies, % space used in your home, time spent working in home, home utilities, driving between work locations, etc., as you can save tremendous amounts on taxes (as compared to a full-time employee's taxes). From personal experience, I can tell you that paying an accountant $500-$800 to do a "Schedule C" for you will easily save you thousands on taxes every year, provided you keep track of expenses (try Mint.com or Quicken to do it easily). Also, make sure to make estimated tax payments every quarter to the IRS and state tax authority. Just my two cents, Greg

Jonathan Vanasco

September 8th, 2013

Imho The glassdoor numbers are largely bs; I've seen numbers on their for payrolls I've managed that didn't line up at all. C-List talent and entry level people get 45-90k/year and bill out at around 45-90hr - often through recruiters on short term contract. A and B list talent costs more. It can sometimes be worth hiring them for short term needs, but I'd agree that you should always bring people in-house when you can and do professional development. It can be cheaper and better. Standard ad agency and dev shop rates are 200-300 on a billout per hour for people working on web apps (startups, ad agencies , etc). Those are people with 1-2 years experience in Rails, Django, Drupal, Wordpress. Places like pivotal labs charge $60k/month per programming pair, which works out to around $190/hr assuming they work 8 billable hours a day. Those are the billout costs to the client. As I described earlier, roughly 1/3 of that is earmarked for compensation; the rest overhead and profit. That's standard across every agency and shop I've seen. Having used companies that bill on day rates like pivotal in the past, I've found it to be more like you get 6-7 billable hours day. You can always find some spare green people to hire at 100k or less and do a lot of professional development with them to make them good employees. When you're talking about the calibre and type of employee that actually gets shit done though, they cost more. A random Wordpress person might be $50hr, but getting any Rails help under $125/hr is near impossible. Anyways , my example is this: If Your yearly comp is $160k... You probably cost the company $195k to keep on payroll (tax, benefits,etc) Your freelance rate is $160/hr (based on 1000 hours) If you were working for a dev shop , or your competition is a dev shop, they would probably charge $240/hr for the same resource ( 160 / 2000hrs* 300% [resource,margin,profit]) [the actual markup would be different across providers, some basing off 2000hrs, others 1400; some with more overhead or profit, etc] The general point is that the same person and resource has different hourly costs depending on the employment status. Sent from my iPhone

Fareez Ahmed

September 7th, 2013

Could you kind share your findings? In a similar situation. ------ Sent from my mobile device

Brian McConnell

September 7th, 2013

The answer is as much as possible but be aggressive with withholding/estimated payments. You'll get it back later.