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I work as a contractor in IT, and it works very nicely for me (able to claim laptops, training, home office expenses and offsetting my mortgage with money set aside for tax etc).

However recently I was presented a role which would be great for my career progression, unfortunately it is a permanent position.

I would rather not have wind up my business, only to spin it back up if my next gig is a contract role again.

So I would like to be able to present to the company something like take me on as a contractor, but let's pretend it's like a permanent.

So if I pull that off, how much could I negotiate as my hourly/daily rate?

A permanent role has a bunch of over heads, e.g., insurance (acc), holidays, sick leave, performance reviews etc. Let's say they were offering $100k per annum (they are not offering that, it's just a nice round number) what would the total cost be?

For arguments sake let's assume I would take 4 weeks leave per year.

Now I am personally interested in how this would work in New Zealand, however I feel this question would be useful for people in other countries, so general/other countries answers are welcome.

tl;dr;

If a role is advertised at (say) $100k p/a, how much could that be in contractor $ per hr (or day)?

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    When you are a contractor with this company, do they pay you directly or through an agency that takes an additional cut? While I'm not sure about NZ, there may legal issues with effectively treating you as a full-time employee, but not offering you full time benefits. – selbie Mar 2 at 5:54
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    These costs aren't hidden. They're well known to the company that is doing the hiring. They know very precisely how much non-wage costs are per employee. That being said, there are a number of websites that can give you a more or less accurate cost comparison between employee versus contractor costs. Here's one that may help - toptal.com/freelance/… – joeqwerty Mar 2 at 5:59
  • So if I pull that off, how much could I negotiate as my hourly/daily rate? - What is your current hourly/daily rate? Start with that. – joeqwerty Mar 2 at 6:10
  • How many hours are expected of an employee? 35hrs / wk, 40 or 42 - from there divide annual salary by hours per year and see what you get - just a start point though... – Solar Mike Mar 2 at 6:24
  • Be aware that taxing authorities generally take a dim view on contractors that look just like permanent employees. It would strike me as odd if someone's biggest concern in taking a permanent job was the effort of letting their company go dormant or close. Given how long a permanent position generally lasts and the amount of effort involved to deal with the company, that explanation doesn't make a huge amount of sense to me. I'd suspect that there was something else that was concerning the candidate. – Justin Cave Mar 3 at 4:13
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Generally most contractors I know charge double per hour to end up with the same per year, assuming it's a long term gig (months or years at a time.) This is when the customer are providing the office space, parking lots, management supervision and so on and you're kind of "body shop" being like a full timer. The difference in the money goes to taxes (where I live employers have to pay things like unemployment insurance and pension contributions that are larger than the amounts deducted from the employee, and as a contractor you'd be paying both for yourself), sick days and holidays (both vacation and things like Christmas Day) where again you're paying yourself but the customer isn't paying your company, your own training and betterment, conferences, etc. Plus whatever other benefits they offer that you're not using, and of course covering downtime when this contract ends and it takes you a while to find the next. You need to save some of what you pay yourself to have for those times, as well as paying for the benefits they aren't providing you.

Since there are essentially 2000 hours in a year, this means you can just take the annual salary and lop of the thousands. Your hypothetical $100K/yr becomes $100 an hour.

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As an independent contractor you don't usually look at it that way. What they pay their staff is an interesting factor but not a deciding one in terms of your remuneration. If you have a set rate you stick to it, or you discount a bit because they're guaranteeing you x-amount of work.

There is no set or optimal rate based on what they pay their employees, it's whatever the market will bear. As a contractor I've asked and been paid anything up to $600 an hour when their existing Engineers make $20 and my competition charges $100. The difference being if their existing staff and others could actually solve the problem they wouldn't need me in the first place. So I charge accordingly.

Or you go full time.

I get full time offers a couple of times a year, I just turn them down because I don't want to work for someone else, the amount is not the biggest factor. I charge what I always charge regardless of whether they pay their people $5 or $500.

  • I would add to this, that if you can live with the pay (cut), take the job if it is that good for both you and the employer. There are online pay comparison calculators. Just bear in mind that employers can be nervous about taking on ex contractors, especially when times are hard). Make sure the other things (training, laptop, etc) are negotiated into the contract. Leave your business running for the time being, albeit without income. If this proves to be long term, you can put it dormant (see your accountant). – Justin Mar 2 at 11:42
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    I agree. I have a fixed hourly rate. I may offer a client a discount on that hourly rate, but I don't negotiate with them based on what they would pay a full time employee. – joeqwerty Mar 2 at 14:59
  • @Justin what's your thinking behind that it 'if I can live with the pay cut it would be good for me...' – DarcyThomas Mar 3 at 19:31
  • I meant if the job is a good fit, not if the pay cut is good (is that ever a good thing?). With regard to pay cut, a large number of people - including myself - spend more as they earn more. Move to a better job that pays 50% more, and your monthly spending will increase. Over the years, repeat, to the point where if you have to take a large pay cut, you suddenly can't meet all those monthly bills. Will your new salary comfortably cover your spending? – Justin Mar 4 at 8:05
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I have seen it from both sides. When I worked as a contractor, I was paid more than twice as much as I currently get as a permanent employee. It felt great and I felt rich. However, I had to pay for a number of things that I now receive for 'free' as part of my package: Paid vacation, paid sick leave, insurance, payroll, training, the company pays a contribution to my pension, and there's a range of fringe benefits that I can choose to make use of (eg. gym membership). I also feel more secure in my employment, though I will concede this may just be an illusion. I generally don't need to file a tax return because the payroll department works out my tax under the UK's PAYE rules.

When I switched back to become a full time employee again, I had to be realistic about the salary on offer. Most employers have an idea of the maximum they are prepared to pay. They can sometimes stretch it a little bit for the candidate who brings something exceptional. I certainly get the impression that the scope for negotiation is much less then you might hope. I remember the CV of one candidate, where my manager had written in the margin,"A possibility, so long as he understands we won't pay that much" - the candidate's salary expectation was ~25-30% higher than what was on offer for the role.

It is not really a question of taking your current contractor rate, and subtracting what you perceive is the value of the things your future employer will give you for 'free' (the holidays, the sick pay, the pension, etc.) It is really a question of finding out what the job pays and whether you can make that work for you. If the job is advertised (or you find out) that it pays 'up to' 100k, there is no point you blazing in there and demanding 150k without bringing something special to the table. Equally, don't do yourself a disservice and meekly accept the 75k they offer at first.

Lastly, you also say:

I would rather not have wind up my business, only to spin it back up if my next gig is a contract role again.

I wonder how long are considering taking this permanent role. Permanent employees tend to stick around for a few years, generally not planning on leaving quickly. If you are imagining your 'next gig' as perhaps just a few months away, it could do you more harm to quit a permanent role so quickly. Being a permanent employee takes some commitment, that you will give proper notice according to your contract and equally that the employee will likewise give you proper notice if they intend to let you go.

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In my area of the US, I've been told that generally an employee costs a company 30-40% more than the employee is being paid.
For large companies with huge perks like MSFT, this can be 50%+ because their healthcare is stellar ($1k/year for gym membership or health club dues, chiropractic maintenance covered at $5/visit).

I know that 7.5% of the above 30-40% is "matching Social Security tax" so you might subtract that in New Zealand.
Another (large) part of that cost is mandatory health insurance.

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