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Contractor vs Salary (was Re^3: How much is an web-based application worth?)
by merlyn (Sage) on Mar 17, 2005 at 15:44 UTC
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I'm not sure how you're doing your math, but if it's $15/hr as a contract, and not as a salary, then it's worth about $15,000 a year, not $30,000 a year.
From your hourly rate, you have to subtract all those things that an employee gets paid for them, such as office space, materials, training, downtime (sick, vacation), healthcare benefits, retirement benefits, marketing costs, administrative costs, and the booking ratio (time spent billing vs time spent on overhead or just no work).
I've been a contractor and a small business owner for almost 20 years. The formula is about right. $100/hr for billing is $100K a year, not $200K. Proven repeatedly by my direct personal experience.
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In the US, if you're not marketing and admining, you're not a contractor, so you can't be 1099. The things I listed are all necessary to pass the IRS "20 question" test to determine whether you're a contractor. You do have to look and act like a business to be a contractor. That is, you do need to have an office, and perform marketing and admin (spend money on yellow page advertising locally, at least, and have a distinct office for your work). I can't see how you can simply dismiss those.
Unless you're kidding yourself, and you really should be on W-2 temp, instead of 1099 contract. In which case, you probably want to get a lawyer. {grin}
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Tax breaks? Surely you jest. In the US, an independent contractor has to pay the employer contribution of the federal, state, and sometimes city taxes. As an independent contractor, you don't get the employer to chip in on any benefits. You can't just compare the take home pays: you have to figure in everything else an employer provides that doesn't show up on your check stub.
Office space costs money is some places, and is significant. I'm not sure where you live, but it certainly figures into my budget in Chicago. Materials are significant too: I have to buy my own computers, printers, paper, and everything else. I pay for my phone, the lights I turn on, the electricity my monitors turn into heat, and everything else.
Some people are quick to point out that a lot of these expenses are deductible, but you're only saving cents on the dollar. A dollar of deductible expenses does not save you a dollar of tax money.
Many people don't realize what they are spending so they can be a contractor. If the employer supplies you space and equipment and you only work for them and work the same hours everyone else does, you're an employee by another name--you don't pass the IRS's test for independence.
--
brian d foy <bdfoy@cpan.org>
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Well, I think that there's a distinction between contracting and running a small business. I've been contracting sinve 1998 until this year. Our country has free healthcare, but I do supplement it with insurance (about $100/mo). As for retirment benefits, I guess it's a cultural thing. I consider that a personal expense like food or rent, because it's rarely offered as a benefit from an employer in New Zealand. My administration costs are small, I enter my time in my accounting package each day (takes 5 minutes), and it generates my invoice automatically each month. I spend another half an hour a month entering expenses. I've never made any thing like $100/hr, but my declared income has always tended to follow my rough formula. This includes things like 4 weeks holiday per year, plus sick time.. I guess I do my training in my own time (outside of my 40 hour week) so you could argue that I work more than a standard day
However, as part of my new years' resolution, I've switched from contracting to running my own business in January - and all the additional costs like marketing, booking ratio etc have come into play. I'd make much more as a contractor, but I enjoy this more
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