[NA] Contract vs. Salary pay rates for tech jobs

CJones

CJones

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Can someone enlighten me about the look-outs when looking into a contract tech/developer position as opposed to a salary position?

I have read some info that says that a contract position should pay as much as 100% more than the equivalent salary position due to the employee having to pony up for taxes that are covered by the employer for salary positions. Then I've read other info that says that taxes for contract positions equate to about 40% of gross pay. The problem is that all of the numbers I mentioned are from 2010 or earlier and the only recent numbers I can find are for the UK.

As a hypothetical - what would be the expected hourly contract rate for an $80k salary entry/mid-level developer position?
 
Currently the SS tax rate is 10.4% on the first $110,100 and Medicare is 2.9% so you'll need to figure that in plus the state tax, which in GA is 6% plus your applicable Fed tax rate. Don't forget to research and add in the monthly cost of health insurance. I currently pay a little north of $1200 a month for me and my wife.
 
EppyGA said:
Currently the SS tax rate is 10.4% on the first $110,100 and Medicare is 2.9% so you'll need to figure that in plus the state tax, which in GA is 6% plus your applicable Fed tax rate. Don't forget to research and add in the monthly cost of health insurance. I currently pay a little north of $1200 a month for me and my wife.
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Perfect. That's exactly the kind of info I was looking for.

Thanks!
 
Don't forget health coverage, retirement, education, and all the other stuff that's part of a salaried position.

Example, in addition to my base salary dollars, my employer pays:
Their share of the taxes
Their share of my health coverage (which is more than what I pay)
Up to 4% of my salary into a 401K account based on my contributions
The equivalent of 120 hours at my "hourly" rate in vacation.
$5250 per year in tuition/education expenses.
​
 
Also, don't forget unemployment taxes and workers comp insurance. While self-employed don't have to pay those taxes/fees, it should be considered part of the pay package when comparing salaried to contract employees.
 
But the other side of the coin is that there are many many more deductable expenses as a contractor that are not deductable as an employee.
 
It is very rare that I get more than a 20% premium for C2C/1099 jobs vs their W2 counterparts when a company will hire either way. Middleman recruiters are particularly churlish with 1099 rates vs W2.

The companies looking for "C2C only" seem to more often pay high rates, in the 80-100% premium range.

Rates for pure offsite have been in the 50-60% of normal salaried position up until recently -- I'm starting to see near parity lately, as the labor pool is very shallow and fought over.

This is in my experience as a jQuery/Mobile dev.
 
My company offered to salary or 1099 me, After running the numbers I took the salary. That was 5 years ago so I don't have specifics :). I'm a contractor, but salaried.
 
Tim covered the benefits side well but on the plus side for a contract is you get paid for the hours you work as opposed to the salaried hours you put in. I don't know any salaried engineer types who only work 40 hours anymore.
 
jtheune said:
Tim covered the benefits side well but on the plus side for a contract is you get paid for the hours you work as opposed to the salaried hours you put in. I don't know any salaried engineer types who only work 40 hours anymore.
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NG has an HR policy that will ding managers if their folks on Gov't are working more than 40 hours a week. Yes, if there's a failure or problem, we work until it's fixed. But then we take compensatory time off if we can in the same pay period.

Since most of our work is firm fixed price to the gov't, and that work is based on 40-hour man-weeks, if staff are consistently working longer than that it's a sign we've underbid the labor, and we should have bid more people for more money. Also, the Gov't looks at the hours worked even on FFP tasks, and complains if people are "overworking" because they feel they won't be getting quality work.

I find the whole "bid me a firm fixed price but let me audit your labor hours" thing bizarre, but apparently that's how things work in the parallel universe of Government.
 
CJones said:
As a hypothetical - what would be the expected hourly contract rate for an $80k salary entry/mid-level developer position?
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It would mostly depend on the cost of living and job market in your area. I always figured that FT should be 80% of contract rate. So for $80K annual salary I'd ask for $50/hr ((50/hr*2000hrs)*80%).

You can always ask the recruiter if they are getting a percentage of the billable rate or if they charge on top (not sure of the proper terminology) then use that to gauge your asking rate. You have to be careful with this game though because you can price yourself out of a job if the recruiter can't make enough off you.
 
How long is the contract realistically likely to last?
Are you contracting directly or via a recruiter or other middleman?
Is someone else doing the tax withholding, and if so, who?
What part of the country are you in?

These are all factors.
 
TMetzinger said:
NG has an HR policy that will ding managers if their folks on Gov't are working more than 40 hours a week. Yes, if there's a failure or problem, we work until it's fixed. But then we take compensatory time off if we can in the same pay period.

Since most of our work is firm fixed price to the gov't, and that work is based on 40-hour man-weeks, if staff are consistently working longer than that it's a sign we've underbid the labor, and we should have bid more people for more money. Also, the Gov't looks at the hours worked even on FFP tasks, and complains if people are "overworking" because they feel they won't be getting quality work.

I find the whole "bid me a firm fixed price but let me audit your labor hours" thing bizarre, but apparently that's how things work in the parallel universe of Government.
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I should have said salaried non government contract. I remember from my days of working at General Dynamics that the government contracting work is a separate reality. The rules that apply to private companies are much different then the rules that apply to government workers or people contracted to the government.
 
It's truly bizarre. We had a guy come over from the commercial side, and he saw his first invoice and hit the roof. He expected to see an invoice for one month of FFP work amounting to 1/12th of the bid for the year, along with a list of deliverables. When he saw the invoice included everybody's timekeeping data he couldn't believe it.
 
I'm a contractor on W-2 status, meaning that the contracting agency does, at minimum, the payroll taxes and other paperwork. I've been in some contract positions where no benefiits were provided, and others that provided benefits comparable to full time employees. Some positions may be negotiable in that you could accept a lower hourly rate in return for a more generous benefit package.
 
Yellowbird said:
I'm a contractor on W-2 status, meaning that the contracting agency does, at minimum, the payroll taxes and other paperwork. I've been in some contract positions where no benefiits were provided, and others that provided benefits comparable to full time employees. Some positions may be negotiable in that you could accept a lower hourly rate in return for a more generous benefit package.
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Annoyingly, the reverse is almost never true. I have tried 100 different ways to "cash out" lame benefits packages in exchange for their certainly meager cash values, or even fractions thereof, and haven't found the successful tactic yet.

I have 2 insurance plans right now, the inferior one being a complete waste -- but they wouldn't even give me $1 to take it back. Sigh.

Would love to hear of anyone succeeding at throwing benefits back for cash-value, and the tactic employed. Maybe it's an LA thing :D
 
gkainz said:
But the other side of the coin is that there are many many more deductable expenses as a contractor that are not deductable as an employee.
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Owner employees do not get to deduct nearly as much as you would think. The 3% rule kinda hoses us.

Sent from my SAMSUNG-SGH-I777 using Tapatalk
 
Benefits are worth about 28%. That said, it is really going to depend how commoditized your skill set is. A desk top tech is not likely to make much more than a W2 employee, while a premium skill set like architect level Cisco or VDI will probably pay better. Supply and demand.
 
ChrisK said:
Owner employees do not get to deduct nearly as much as you would think. The 3% rule kinda hoses us.

Sent from my SAMSUNG-SGH-I777 using Tapatalk
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Not familiar with "the 3% rule" ... I was an S-Corp for about 15 years (still am, just not active now)
 
jtheune said:
Tim covered the benefits side well but on the plus side for a contract is you get paid for the hours you work as opposed to the salaried hours you put in. I don't know any salaried engineer types who only work 40 hours anymore.
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I have worked as a salaried electrical engineer for the last 6 years and with only 2 or 3 exceptions, I work a 40 hour week.
 
Chris - As a rule of thumb, if you want to make 80K/yr then you should charge 80 $/hr. It's fairly simple to build a spreadsheet model of income and expenses to verify the number but the simple method of dropping the three right digits to get hourly rate works for ballparking the hourly rate if you can maintain full time employment.

I spent many years working on a contract basis. It has it's good sides and bad sides. Always plan well ahead and keep a good nest egg to get through the lean times.
 
n12365 said:
I have worked as a salaried electrical engineer for the last 6 years and with only 2 or 3 exceptions, I work a 40 hour week.
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I'm going to make a guess that you work for a government agency or are contracted to a government agency. They play by a different set of rules then commercial concerns.
 
jtheune said:
I'm going to make a guess that you work for a government agency or are contracted to a government agency. They play by a different set of rules then commercial concerns.
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I have worked on government contracts at my previous job and you are correct about it being a different set of rules. If I can avoid it, I will never work another government contract again. My current job is for a large commercial engineering/financial company and 40 hours per week isn't unusual for the division I work for.
 
Sorry for my short post.

I just reviewed the 2010 IRS publication on business expenses, and I guess the percentage of employee interest depends on the item being deducted; however, here is an example of what I'm talking about:

http://www.irs.gov/publications/p535/ch06.html

Under insurance premiums:

If an S corporation pays accident and health insurance premiums for its more-than-2% shareholder-employees, it generally can deduct them, but must also include them in the shareholder's wages subject to federal income tax withholding. See Publication 15-B.
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There is a workaround for this, but generally speaking, the IRS says that I have to pay tax on my health insurance ($15k/year) because I own 3%+ of my business.

There are a lot of other deductions with this type of restriction (i.e. you are considered a highly compensated employee if you own 10%+ of your business and lose some other deductions).

Don't get me wrong - I am better off owning my business and can keep the profit as well as my salary - but it is a huge pain in the ass, and the IRS is doing the best it can to eliminate access to deductible business expenses in the case of hard working owner-employees.
 
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Thanks for all the info. Looks like that big dollar contract gig isn't exactly as 'big' as I thought.
 
bartmc said:
My company offered to salary or 1099 me, After running the numbers I took the salary. That was 5 years ago so I don't have specifics :). I'm a contractor, but salaried.
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In most cases where it's a choice, the 1099 contractor route is most likely illegal. The CONTRACTOR vs. EMPLOYEE choice is not just something you get to chose, it's characterized by the nature of the arrangement.
 
A common labor multiplier is that the "contract" should pay roughly 300% of the actual hourly rate going to the employee. One rule of thumb you find tossed around when the billing is business to business is that one third is labor expense, one third is benefits and overhead expense, and one third is profit.

If you run your contracting gig like a business, and you're a sole proprietor, one could argue that the labor expense and the profit number constitutes double dipping. But even so, if you don't allocate half of your rate toward non-cash items (the aforementioned vacation time, retirement funding, health insurance, income tax, self employment tax, workers comp, etc), then you are paying out of pocket for things the company would cover. Oh, and if you go the contractor route and line up your own insurance, please remember disability insurance. It's relatively cheap.

So now you are at the contractor rate being twice your salaried rate of pay. If you will be working out of your home or at the clients' facility, you can drop a little out of the "overhead" side if you need to in order to strike a deal, but it will be relatively small when compared to the various taxes and insurances.
 
n12365 said:
I have worked as a salaried electrical engineer for the last 6 years and with only 2 or 3 exceptions, I work a 40 hour week.
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The exceptions for me are when I'm out of town (country) on travel. Happens often. And I've been a salaried electrical engineer for about 37 years, now.
 
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