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I worked for a company as an hourly employee for approximately 6 years and earned about $35/h plus perks (profit sharing, health insurance/benefits, RRSP matching, company laptop). I wasn't guaranteed a set number of hours but I averaged a little more than full-time. Recently the company hasn't had as many billable hours for the types of projects I usually tackle so they've asked me if I can switch to a contractor role (where I wouldn't receive any perks and would likely get significantly fewer hours, mostly seasonally).

How much is it reasonable to ask for as a percentage increase in my hourly rate when switching to a contractor role? I know that they bill my time to clients at $100-120.

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    Do you know what other contractors charge - that's probably your number. Or maybe slightly higher if they are happy with you. Apr 5, 2021 at 15:17
  • I don't think anyone can give a direct answer to this. You need to take into consideration what additional expenses you will have working as a contractor, such as any taxes you will become responsible for etc... Only then can you make a decision about how much extra you should charge to cover those additional expenses.
    – flexi
    Apr 5, 2021 at 16:16
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    There may be some massive tax and benefits consequences, depending on location (talking about the US here, primarily from 1040-SE and health insurance). Based on mentioning RRSP you may be Canadian so it may not be as bad, but work it out anyway.
    – Pete W
    Apr 5, 2021 at 17:14
  • "How much is it reasonable to ask for as a percentage increase in my hourly rate when switching to a contractor role?" - You have to determine the value of all those benefits over a course of a year. You will have to determine the minimum number of hours you will work per week, keeping in mind, any hours beyond that point drives your hourly rate down. Do you have that information? Have you calculated that information? If they are going to cut your hours from 40 to 20 per week then you will have to pick up the slack with another contract. You obviously can't ask for more than $120 an hour.
    – Donald
    Apr 5, 2021 at 23:53

2 Answers 2

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Another really rough ball park way of calculating a contractor rate is to take the equivalent yearly salary that you want in $k and use that number as your rate.

EG you want to earn $100k per year, so you charge $100/hour.

This roughly takes care of overheads and downtime when you are not working etc.

However, a more correct calculation is to start with how much you want to net, then add in all the costs of overheads (EG liability insurance, business licensing, equipment costs, 401k matching, health care and any other expenses you may incur), figure out how many hours a year you want to work (and are likely to work, not including EG vacation time, and time spent waiting/looking for work) and divide one by the other.

But then you need to make a judgement call about how your desired rate stacks against the local competition, and what makes you worth the rate that you want to earn compared to them.

Finally if you are being paid $xx/hour for your job, then your company is probably internally billing you as 2 times $xx/hour to cover the overheads of employing you, and that the difference between that and what the customer is actually being billed at is their profit.

But don't begrudge them that amount of $. IMHO unless you are capable of going out and taking directly to clients, then I'd consider it as a finders/agents fee for finding the work for you.

And one last thing .. there is also Freelancing.SE which will have a pile more of theses types of questions.

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  • +1 for Freelancing.SE, I had no idea that existed!
    – Pete W
    Apr 5, 2021 at 17:13
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Depends on the sector, but in tech the rule of thumb is that generally you ask for 1.5-2x the salary divided by 1920 hours/year to get a fair hourly rate that takes into account lack of benefits and such when going from full time to full time direct contract. (You can also go through an intermediary consulting firm that will provide you with benefits but then they'l want a cut of their own.)

If the hours are not full time, then go for the 2x because it has to make up for not getting 40 hours/week as well. (In theory you can work for someone else to make up those other hours, but it depends on how many hours they do want and how short notice they want you to be available). Completely unpredictable hour consulting will ask up to 3x.

In your case if you got $70/hr up from $35 then they still make $30-50 an hour on the deal. Of course, it helps to know market rate for your skill set in your region in case the existing numbers are wildly misaligned for some reason. Also, supply and demand always reign, they may think they can get folks for much less and, if they're right, you'll be faced with taking a lower offer or going elsewhere.

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  • And if you want to be in the contracting business, it needs to be 2.5x to 3x.
    – David R
    Apr 5, 2021 at 20:41

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