Contract job have its own risk which I have to quantify in terms of additional % on top of normal compensation. How much should I add in compare with permanent role?
You charge what the market will bear. There is no set percentage. I've done anything from 50 an hour to 600 an hour doing very similar work for different clients.
Factor in timeframes, market price, your judgement of the clients needs and anything else you can think of. But at the end of the day, it's down to how much they're willing to pay you to get the work done. The important part is 'you', with that I mean if you have a great reputation for delivery they want you more than others and therefore will pay more.
There is no set formula.
As a contractor you need to get an idea of three rates:
your absolute miniumum rate is the lowest that what you personally are willing to negotiate down to, the rate below which you operate at either such a loss or earn so little that you rather not earn anything at all, will walk away from a job and keep looking for better opportunities.
Below that rate you prefer to be live of your savings and will stay at home, job-hunting and doing things you enjoy more than work.
This minimum rate is very personal, somewhat flexible and tends to go down for most contractors the longer they have been between jobs ...
the rate which gives you equivalent income - what would your yearly income after taxes be as a permanent employee and work out what your gross hourly or daily rate should be to get a similar income.
That requires you to make realistic estimates of
- the number of billable hours/days you will make in a average year, taking into account unpaid training, sick days, holidays and time between contracts
- extra expenses you incur as a contractor your wouldn't have as employee, for instance: accounting and bank fees, equipment, travel expenses, insurance etc.
- pension contributions/ retirement savings
- taxes and tax benefits
From an economic perspective it doesn't make sense to prefer contracting over a equivalent permanent job when you can't achieve at least this rate, assuming that you can find either such a permanent job or actually negotiate that rate and there no other (personal) factors that make contracting more attractive...
the market rate, both the average market rate and typical bandwidth around that average.
Regardless of your own needs and wants, rates are also governed by the market forces beyond your immediate control. Supply and demand, scarcity and surplus, sometimes regulations and laws play a big role in what rates are actually paid.
Be aware that such rates are sometimes above, but sometimes also below the equivalent income rate.
In the end you get whatever rate you can negotiate and which both you and your employer are willing to accept.
As a good negotiator and a very skilled employee that may be (well) above market, if your positions isn't as strong then maybe you are willing to settle for market average or even that.
My rule of thumb: Daily rate times 120-150 should equally your annual employee salary before tax.
This reflects that you don’t get paid on holidays (so in the U.K. you’d have 230 days if you get jobs all the time), the fact that you don’t have jobs all the time, because your contract can be cancelled at any time, the fact that you have to pay taxes, insurance, and pension yourself, and possibly a tax advisor.
Obviously taking a short term contract that doesn’t achieve this is better than no money in your pocket, but the rate above is what you need to achieve regularly.
When you start, before you start spending, make sure your taxes are paid, that you save up enough money to live on for 8-12 months, and money paid into your pension fund. Then you can spend money.
And don’t try any tax evasion scheme. Quite a few people in the U.K. joined schemes that were clearly tax evasion and some got bills for over £100,000. And nobody feels sorry for them.
It has little to do with risk. It has mostly to do with taxes and expenses that the employer normally pays. However, I've heard of many freelancers charging as if they'd only work 10 months a year, making up for some down time they can run into and of course vacation, but it is not the reason for the common freelancing rates.
The bottom line is that you might be paid $150-$250 a day at your normal job, while charging anything from $50-$250 per hour as a contractor for the exact same job, depending on how skilled you are and how much demand for work you have. It's very industry specific too and eventually just comes down to the value you're providing. This extra rate will make sure that after all of the expenses you have to pay as self-running business won't leave you with a few bucks remaining after the job is done.
I've seen this question asked numerous times, you'll find more success looking for exact methods question via a search engine search or at SE Freelancer. One example of such articles is one by Ramit Sethi where he suggest a few methods to come down to a number that makes sense for you. They seem to be somewhat in line with what I've seen in the past from similar discussions where you find out your number by making it a function of what you're trying to achieve with your bottom line.
TL;DR - Varies, depending on where you are and what you're doing.
Depends on the location, because obviously corporate and personal taxation rates differ between jurisdictions.
Depends on the industry. Some corporates will work with a self employed person, others insist that you have your own consultancy company (a legal entity).
Depends on the clients. Are you working for consumers (ie people who commission you do do something for them) or a business (basically B2C or B2B)?
Depends on the kind of "contracting" you have in mind. Do you mean individual small projects for many clients (eg graphic design work or marketing/branding or bookkeeping) - what I would call "freelancing". Or do you mean something like software projects which can last months / years? Or something in between?
Here in the UK, maybe 20 years ago, that was an easier question to answer. Take an hourly rate, and multiply by 2000. You then need to subtract corporate and personal taxes from that and the permanent rate against which you're comparing (see point 1). The actual amounts of tax will vary depending upon how you choose to be paid. Here, dividend payments are taxed at a lower rate than earned income and do not attract an additional "National Insurance" tax.
From an employer's perspective, they have lots of options for getting work done. The most straightforward option is to hire a full time employee into a permanent role. But, that's also the least flexible option. Some employers value flexibility - they want to be able to call someone up and have them do some work for a short time, without having a permanent line item on their employee roster. The key to pricing contract work is to focus on that value. Otherwise, from the perspective of the person paying you (the employer), the cost is the cost.
So - don't start out by taking your full time salary and trying to multiply it by some overall factor that rolls everything up into one. Many people do that, but it's very easy to get it totally wrong. Instead, determine your total carrying cost to an employer - the cost that includes salary, benefits, employment taxes, and so on. But make sure you include operational overhead, if the employer won't be handling that (i.e. do you have to have your own office? With a computer? Or will you be working at the employer's office on their equipment?) Depending on your location and your job, this carrying cost may be 2 times (or more) what your actual salary is. And, it should be a reasonable proxy for you to "earn the same salary" in the sense that you've rolled all the expenses you will be carrying (instead of the employer) into a base rate.
Once you have that base rate, you need to determine how much to charge the employer for the convenience of having you on contract. That can sound very intangible, but it's typically straightforward to determine, based on the nature of the contracting arrangement. One way to think of "convenience for the employer" is that it's directly equivalent to "risk for the contractor." As the terms of the contract approach equivalence with full time employment, the convenience/risk drops off, which means employers will be looking for a cost very close to the FTE carrying cost. As an example scenario, imagine if you have a contract that guarantees payment of 40 hours a week for 2 years, there's no "out" clause allowing the employer to dump you at will. In that case, your risk factor may be very small - or zero - because, essentially, your employment is likely just as stable/predictable as an actual employee.
However, at the opposite end of the spectrum, imagine contracts that approach "freelance" style work, or "emergency" coverage. You may be working purely on call, or you may only have a month-long contract to fix a specific problem. These contracts create a lot of convenience for the employer, but carry a lot of risk for you - you may find that you're out of work and/or not getting paid at all. Because of this, it's expected that contracts like these would carry a large risk factor. Typically, for contracts less than a quarter, the factor may be 100%. For very short duration emergency situations, it may be has high as 500%.
So - as other answers are correctly pointing out - you need to determine the overhead cost you'll now be carrying (instead of the employer) - but, ultimately, that's just a wash - it's just a transfer of cost from one party to another, it doesn't really impact what you actually take home as salary. The difference in actual take-home pay needs to be based on risk to you, which is equivalent to convenience to the employer.