I want to hire a person as an independent contractor, and wish to
offer him an hourly rate of pay that would equal or exceed his current
compensation as an employee with another company (in California). He
will be switching from a W-2 employee situation to a 1099 situation.
He is currently earning an annual salary of $90,000 in addition to
standard employee benefits. He is at a mid-management level, and I
believe his standard employee benefits include health, dental and
vision insurance, a non-matching 401k plan, and other "standard"
employee benefits for a private California mid-sized company. I do not
believe he has profit sharing or other non-conventional benefits. I
believe he would have to pay a federal self-empoyment tax of 15.3%,
but that is the only data point I have. I don't know what the cost
would be of covering a "standard" benefit pakcage if it was purchased
individually.  My question is this: Can you make an intelligent
recommendation for an hourly rate based on the info I've provided, and
if so, what is it?

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Request for Question Clarification by czh-ga on 13 Jul 2006 12:51 PDT

Hello thissusan-ga,

This is a more complex question than you would think since there are
lots of variables involved. There are two fairly common rules-of-thumb
that I've seen used in considering W-2 vs. 1099 status. 1) Contractors
are paid about 30% more than salaried employees. 2) Divide the annual
rate of pay for a permanent employee by 1000 to find the hourly
billable rate for the contractor. In your case, offer $90/hour for
your candidate currently earning $90K.

The most important issue to consider is whether the person you hire
meets the rules for independent contractor status.

http://www.irs.gov/faqs/faq-kw65.html
http://www.synergistech.com/20qs.htm
http://ohioline.osu.edu/cd-fact/1179.html
http://www.hrtools.com/etoolsapplets/indcontractortester/contracttest3.asp

I can provide you with a selection of resources explaining these
preliminary findings. Will this meet your needs?

I look forward to your clarification.

~ czh ~

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Clarification of Question by thissusan-ga on 13 Jul 2006 13:47 PDT

I am sure this person qualifies as an independent contractor, so I'm
not concerned with clarifying that point. Rather, I am trying to
understand what additional costs would be incurred by him as an
independent contractor, so that I can adjust my rate accordingly to
match his current compensation (including the total of salary and
benefits). I want to understand the additional costs in some detail if
possible. For example, I think the federal self-employment tax is
15.3%, and I have heard ball-park estimates of 20% or so for employee
benefits like health insurance, etc. If these numbers are correct,
then the hourly rate I offer should be at least 35% higher than the
hourly rate he earns from  his full-time positon... unless there are
other offsetting financial considerations, like he can deduct certain
things as a business expense. I am looking for something that I can
use to show him the rate I am offering is equivalent to his current
compensation at $90,000 per year plus standard benefits. Does this
help clarify?

Hello thissusan-ga,

Thank you for the additional information about what you?re looking
for. As I said in my request for clarification, there are some rough
estimates on how to compare earnings as an employee and its equivalent
as an independent contractor. The rule of thumb is 30 ? 35 per cent
more payment as a contractor to make up for the various taxes and
benefits that are paid by the employer when working as an employee.

As you requested, I?ve found some resources to help guide you through
developing an appropriate comparable pay rate. Most of these are
written from the perspective of the employee/contractor but you can
use them for figuring out a rough estimate. There may be additional
considerations that only your prospective contractor would know about.

I suggest that you review these guidelines and use them for developing
a discussion framework for presenting your proposal.

This article from salary.com gives you an excellent overview of the
issues to consider when you?re contemplating switching from being an
employee and going out on your own as an independent contractor. It
presents the points you should consider and it provides a framework
for figuring how to develop an hourly rate comparable to the
equivalent yearly salary.


http://www.salary.com/advice/layouthtmls/advl_display_Cat14_Ser67_Par150.html
Pay Yourself Right When Being Your Own Boss

Independent contractor fees.
But as a contractor, you need to pay for your own benefits, as well as
additional Social Security contributions, so the number needs to be
higher. Salary.com uses an adjustment factor of 30 percent to convert
an hourly wage for a salaried employee to an hourly wage for a
contract employee. Multiply your unadjusted hourly rate by (1 + 0.3)
to get your adjusted hourly rate. For example, if your unadjusted
hourly rate comes out to $20 per hour, your contract rate should be
$20 * (1.3) = $26.

An example shows how this works for a senior-level web designer in
Kansas City. A Web designer III working in Kansas City makes $66,244.
The unadjusted hourly rate for this position is $66,244/2,080, or
$31.85. Adjusted by 30 percent, the contract rate comes to $41.40.

===


This worksheet from a longtime independent contractor will help you
review a wide array of elements that the prospective
consultant/contractor should consider before leaving work as an
employee. The formulas presented here should help you develop a
suitable proposal for your situation.

http://donxml.com/grokthis/articles/249.aspx
Consulting Rate Worksheet
Here?s a worksheet that FTEs and Consultants could use to convert
their incomes from one to the other. There are a lot of variables, but
I?ll try to account for all that I know of. This is written for the
USA, but I?m sure you can easily translate it for other countries.

===


Below are several links to discussion forums where contractors discuss
the pros and cons of working as an employee vs. a contractor. They
provide insights about the issues to consider while developing hourly
rates that are comparable to yearly salaries.

http://discuss.joelonsoftware.com/default.asp?biz.5.17401.13
Rate of Pay for long term contract
http://discuss.joelonsoftware.com/default.asp?joel.3.256380.13
($70 - W2 vs. $75 - corp to corp)

---

http://discuss.fogcreek.com/joelonsoftware3/default.asp?cmd=show&ixPost=102326&ixReplies=12
Pay Rate as a Contractor v. FTE
See comments from MSHack, Monday, January 12, 2004 for detailed instructions.

---

http://www.buncosquad.net/01/1099-vs-w2/
Busting freelancer myths.
1099 vs W2
2005/02/13 16h38 

When freelancers discuss payment, they often mention 1099 or W2. On
the surface, these describe the tax relationship between you and the
other party. As it turns out, however, the path you choose determines
much more. Read on to learn the pros and cons of each.

---

http://icca.go2discuss-it.org/messages/9/2111.html?1056175473
Spread between W2 and 1099

---

http://www.twopeasinabucket.com/mb.asp?cmd=display&thread_id=1835700
1099 vs W2... Those with experiences with either or both of these... NEED ADVICE.

===



Sometimes a contractor has the option of charging by the project
instead of by the hour. This article provides some pointers on this
possibility.


http://www.1099.com/c/ar/ta/HowToCharge_t042.html
Should you charge by the hour or the project?

===



Here is an earlier Google Answers question that asked for similar
information that might be useful to you.

http://answers.google.com/answers/threadview?id=463647
Q: W2 versus 1099

===


I trust that the information I?ve provided will help you develop an
effective proposal. Please don?t hesitate to ask for further
clarification if any of this is confusing.

I wish you well for hiring this candidate.

All the best.

~ czh ~



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1099 vs w-2
hourly rate 1099

Hi Thissusan,
I have been a contractor for a few months now. I decided to go through
pacepros.com which bills the company, takes 6% for their cut and then
the rest sits in an account to pay all the other bills (payroll taxes,
insurances, etc), and then in turn makes me a W-2 employee. I in turn
get group rates of benefits such as medical/dental, etc. Finally
anything left over ends up as salary. I've seen mybizoffce.com online
but haven't used them. Anyway, I hope that helps - let me know if you
have any other questions about my experiences with them.