Yourself, Inc. News & Views President's Podium

By Mike Sharp Originally published in News & Views January 2000 issue. Copyright 2000 STC-Philadelphia Metro Chapter. For permission to reprint this article, contact the Managing Editor.

In the next millennium, individuals are more likely to have multiple employment opportunities during their professional lives. Millennium Resolution #1: I will stop using the term "permanent" to refer to employment. Of course, we haven't had "permanent" employment for a long time, but we still call it that. Welcome to the third millennium! All employment is temporary, even an assignment that lasts for twenty years. I will prefer the term "regular" employment for those jobs that are not contract employment. Millennium Resolution #2: As a contractor, I will do a better job of treating myself as a business. A few years ago when I figured out how to set my hourly rate as a contractor, I thought I had turned a corner in my life. Here's how I did it: Decide how much money you need for net income; say for example, $50,000 will pay your part of the bills next year, excluding health and disability insurance (your working partner will pay the rest, including the lease for the two Porsches). Figure out how many hours you can bill next year. Assume that you decide on a two-week vacation, ten sick days, and ten paid holidays. That's thirty days divided by five, or six weeks of paid time off. Subtract 6 from 52 to get 46 weeks, or 1840 billable hours (46 x 40). Figure the cost of any necessary "benefits" such as disability and health insurance. Assume that you can get group health coverage for your family for $500 per month. Assume further that long-term disability insurance will cost you another $2000 for the year. Your insurance costs will be $8000 for the coming year ([$500 x 12] + $2000). Figure the cost of taxes and social security. If you are a 1099 contractor, where your agency does not withhold taxes and social security, estimate the amount for paying these taxes-30% for income tax, and 13% for social security-or 43% of your gross income. Divide $58,000 (total net income) by 0.57 (100% - 43% x .01) to get $101,754.38 gross income. Divide 1840 hours into the $101,754.38 gross income to get $55.30 per hour. Rounding up to an even figure, you now know that you need to earn $56.00 per hour on a 1099 contract. If your agency pays you on a W2 basis rather than 1099, divide $58,000 by 0.635 to get $91,338.58. Then divide this number by 1840 to get $49.64 per hour. Rounding up again gives you $50 per hour that you must charge on a W2 contract. After all of these mathematical gymnastics, you might think that you're done, but not quite yet. You can't pay for taxes, insurance, and time off unless you first put the money in the bank. For taxes and social security on a 1099 contract, you must put 43% of each paycheck into the savings account. For insurance, put 8% into the account ($8000 divided by $100,000). For time off, deposit 6% ($50,000 net income divided by 2000 hours = $25 per hour net income times 240 hours of time off = $6000). For a regular 40-hour week, you would gross $2240 (40 hours x $56/hr) and deposit $1276.80 (43% + 8% + 6% = 57% of $2240) into the savings account. If you are paid on a W2 basis, your agency will take care of withholding 43% for income tax and social security, so you need to deposit $313.60 (8% + 6% = 14% of $2240) for time off and insurance.

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Last updated: April 26, 2000 (mvh)