Setting your hourly billing rate - Part 2
In my last Developer Career tip, I discussed ways in which an
Independent Contractor can go about establishing an hourly billing
rate, which concentrated on establishing a rate in concert with those
around you. I promised to discuss how to establish your own personal
billing rate in this tip -- which may be lower or higher than the going
market rate.
The first step is to determine the level of 'take home' pay that you
can live with each week or month. Of course, this figure will vary from
individual to individual, and you may want to use the last job you had
as an employee as a starting point. It's important to start out with
some figure in mind that you can use for comparison purposes, because
as you're about to see, grossing $100,000 a year as a consultant is not
the same as grossing $100,000 a year as an employee. Here are the
typical deductions for an employee making $100,000...
Salary Figures as an employee...
| Gross | | $ 100,000 |
| Federal Tax | 28% | $ 28,000 |
| Social Security | 6.2% up to 76,200 | $ 4,724 |
Medicare | 1.45% | $ 1,450 |
| 401K (Employee) | 5% (up to 10%) | $ 5,000 |
| Health Insurance | $300 per month | $ 3,600 |
| Total Deductions | | $ 42,774 |
| Yearly Net | | $ 57,226 |
Monthly Net | | $ 4,769 |
These figures assume that you are contributing 5% to a 401K Pension
plan, that your employer is matching 5%, that you are paying some share
of your Health Insurance Premiums, and that you are paying no State or
Local Taxes. As you can see, this results in a monthly net income of
approximately $4,769.
This picture gets a bit more complicated as an Independent Contractor,
as there are more payroll taxes for you to pay. You may not be aware
that as an Independent Consultant, you are required to pay BOTH the
employee and employer share of Social Security Taxes. I also HIGHLY
recommend that you continue to pay into a 401K Plan of your own. When
you're an Independent Contractor you can set up a Simplified Employee
Pension (SEP), and you can contribute roughly up to 15% of your Gross
Income into this tax deferred, tax deductible plan. Here's how that
same $100,000 gross salary looks as an Independent Contractor.
Salary Figures as an Independent Contractor...
| Gross | | $ 100,000 |
| Federal Tax | 28% | $ 28,000 |
| Social Security(Employee share) | 6.2% up to 76,200 | $ 4,724 |
| Social Security(Employer share) | 6.2% up to 76,200 | $ 4,724 |
| Medicare(Employee share) | 1.45% | $ 1,450 |
| Medicare(Employer share) | 1.45% | $ 1,450 |
| 401K (Employee) | 5% (up to 10%) | $ 5,000 |
| 401K (Employer) | 5% (up to 10%) | $ 5,000 |
| Health Insurance* | $300 per month | $ 7,200 |
| Total Deductions | | $ 57,226 |
| Yearly Net | | $ 42,451 |
| Monthly Net | | $ 3,538 |
These figures assume that you are contributing both the employee and
employer share of Social Security and Medicare Taxes, 10% to a 401K
(remember, as an employee you contributed 5% and your employer
contributed 5%), and about $600 per month for a group health insurance
policy.
As you can see, by joining the Independent Contracting ranks, you are
taking a 'hit' of $14,775 in your yearly net pay, or about $1,231 per
month. To maintain the same level of 'take home' pay, you would need to
'gross' about $125,000 per year.
Next week, don't miss the final installment of this series: "How to
determine your hourly pay rate - Part 3"
Please read "Setting your hourly billing rate - Part 1" at:
http://www.searchvb.com/searchVB_Tip_Item/1,3380,490805,00.html
------------------------------------------------------------------
Written by John Smiley, MCP, MCSD and MCT, author, and adjunct
professor of Computer Science at Penn State University in Abington,
Philadelphia University, and Holy Family College. John has been
teaching computer programming for nearly 20 years.
John Smiley is president of Smiley and Associates,
http://www.johnsmiley.com/smass/smass.htm a computer consulting firm
located in New Jersey.
