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Setting your hourly billing rate - Part 2

This three-part series discusses methods to establish your own personal billing rate.

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:
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, a computer consulting firm located in New Jersey.

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