Freelance vs Agency Contract vs Full Time Salary

Question

What's the rule of thumb for salary/rates for freelance vs contracts thru an agency vs full time salary?

I personally use a ballpark for freelance rate vs full time rate as 1.4 times the amount of an average full-time salary for the position. I use 1.4 times because that's the average "true-cost" of an employee when medical, benefits, etc are factored in. Of course many other factors come into play including skill, demand, project timeline, etc.

For example, you've found the average pay for a full-time web dev at FooBar Inc. to be $50/hour, so as a freelance hire, you multiply by 1.4 and ballpark around $70/hour.

But for contract, or contract-to-hire positions thru an agency, how do you get a comparable figure? In my experience, recruiters have compared a contract figure to full-time employment, yet I know there's typically more down-time between gigs not getting paid, and benefits not always included.

Is there a rule of thumb, or resources online similar to glassdoor.com for contract and freelance rates?

EDIT: 1.4x is on the low end. Instead of ballpark, I should have said minimum starting point.

Also I'm looking for info on how to price your rate when going thru an agency vs completely freelance. For example, agencies will file you with a W2, while completely freelance you may do a 1099 for taxes (in the U.S.).

Answer 1

Actually a 1.4 multiplier is extremely low for a professional or career oriented position in the United States. The following answer is for the United States since that is where my expertise lies.

The following costs are usually provided in addition to the base salary by private companies:

• Retirement contribution
• Employee bonuses and other perks
• Office space
• Health Coverage
• Paid time off
• Employment taxes
• Equipment
• Disability Insurance
• Liability Insurance
• Workman's Compensation Insurance
• Accountant/Administrative/Payroll
• Profit for the company

These costs must now be paid by you, the freelancer.

In addition, as a freelancer or contractor you typically work full time, but can only bill about 24-28 hours per week.

The multipliers for employees in United States typically range from 2.0 to 4.0, so that is the range you should use as a freelancer.

Note that at a 2.0 multiplier you better be a very lean freelancer or you will not be making what you could as an employee...I am currently contracting and my multiplier is at 2.05, but that is without office space, equipment costs, liability insurance, or workman's compensation insurance.

I also pay myself a little below my market rate, but the work I'm currently doing is very interesting so I'm willing to make it work.

For a freelancer the above (and the edits below) should be used as advice on how to compute a rate.

For an agency contract there really are too many variables, some agencies hire "contractors" as short term W2 employees, in which case you should just look at the salary. Some pay all the employment taxes and some of the insurance costs, but the contractor has to pay for office costs, healthcare costs, etc.

For an agency contract you need to be careful and analyze what costs you are being required to pay for, and then make an appropriate decision.

Edit 1:

There have been some comments about the often quoted dividing by 1000 estimate. This estimate is when you take an annual employee or market rate salary equivalent to the position which you are freelancing for and dividing that salary by 1000 to get the hourly rate which you should charge.

This will give you a ratio of 2.08 (x/1000 is the charge rate, x/2080 is the hourly salary rate, so the ratio is 2080/1000 = 2.08). This is on the low end, but can be sufficient.

Edit 2:

The comments have questioned if employers may balk at a freelancer rate of 2.0 to 4.0 of an hourly salary number.

Someone who understands the real costs of an employee shouldn't. Especially if they are paying a freelancer at the same (or below) rate that an actual employee would incur.

Hiring an employee is time consuming and expensive, so for short term work, or work that needs a specific skill or a niche skill, there is a large benefit for employers to pay a freelancer, even if the freelancer's per hour rate is higher than an equivalent employee.

Edit 3:

Here I will compute the actual range of multipliers for an professional employee.

Assumptions:

• The salary range is $50,000 to $150,000
• Healthcare costs are $650/month = $7800 per year (this is from the new Affordable Care Act, it may vary from this depending on company size, etc)
• Office space cost is $300/month = $3600/year for a single employee
• Retirement contribution is 4% of salary
• Software and equipment costs are $3000 per year for a single employee
• All insurance costs are around $2600 per year for a single employee
• Administrative overhead costs are ~30% of revenue
• The employee receives 6 week of paid time off (PTO)

First, for 6 weeks of PTO means that actual hours worked by the employee is 1840. All fixed costs total to $17,000.

For the low end we have the hourly base rate as $24.04 = $50,000/2080. We have retirement costs as $2000. We have administrative costs as 30% of revenue, so we have to do something with this number. We will assume zero profit here. This means that we have 30% of revenue paid to administrative, and 70% of revenue paid to productive employees. So actual overhead is around 43% of the total employee's cost.

We also have to add the employement taxes, I won't do the calculation here as it is a bit complicated, but it is $3,825 for a $50,000 salary.

For the low end then, total cost is ($50,000 + $17,000 + $2,000 + $3,825)*1.43 = $104,140.

Now we divide that number by the number of productive hours to get $104,140/1840 = $56.60 per hour. This means that the ratio is 2.35.

A similar analysis for the $150,000 results in a multiplier of 1.96. So the more the employee salary, typically the lower the multiplier (this is because the fixed costs become less of the total cost).

Note that all of the costs in the above analysis are very conservative, and many companies have administrative costs of between 50% and 100%, especially professional service companies like software consulting/contracting, architecture, law, etc.

Answer 2

(n.b.: In Canada (and in other countries I'm sure), if you are self-employed, an amount is automatically added to your hourly wage to compensate for lost benefits.

For example, if your benefits are calculated to be worth $10000 / year, and you are working for $20/hr as an independent contractor, you would actually receive $25/hr on your paycheque, but be responsible for your own benefits.)

Full-time employees tend to contribute a lot more than contractors, especially in terms of late hours, weekends, etc. As a contractor, I've never, not once worked a single unpaid hour, having billed judiciously for all of them. But as a full-time employee it's the 'norm.

Moreover, full-time employees get the shaft once again, because benefits, severance and all that good stuff doesn't tend to kick in for 3 months. This can be a long time, especially in web development, where the entire field undergoes a sea change every 6.

That being said, you would think compensation would be about equal. In fact, compensation for contract workers is really set on a case-by-case basis. There are thousands of competencies in web development, and a company may have a desperate need for, say, an Analytics Deployment Expert. This contractor may receive 2-3x the wages of a similar developer, not because of some magical contract multiplier, but because of the urgency and professionalism with which he brings his skills.

So, in conclusion, companies may be prepared to pay anywhere from 1.25x - 3x+ their usual full-time wage for a contractor, if the timing is right. I find a good strategy is just ask for a really, really high number. Then, if they can't afford it, ask what they can afford, and go from there.

Answer 3

I am relatively new to contracting myself, having previously only gone into salaried positions, but I simply calculated my hourly rate on the assumption of 2000 hours of work in a year. Yes, contracting is less stable, but I live in a state where no reason needs to be given for being dismissed from a position, so salaried positions aren't necessarily any more stable than being a contractor. Benefits were not an issue with me, as I receive mine from another source.