In the US most salaried positions come with benefits, such as health and dental insurance, etc, etc.

Is there a rule of thumb that converts salary + benefits to an hourly rate for a 1099? Obviously, there cant be an exact conversion, but there must be a generally accepted rule.

To be more clear, I am looking for a formula along the lines of (annual_salary/2200_hours) + (annual_salary*.25) Or is this unrealistic?

  • My benefits have never been taxed as salary, so I am wondering why there would be a need for such a figure for a W2. However, if you had to report them, I presume you would report the actual cost of providing the benefits just like you report the actual salary that was paid. After all you paid considerably more for me because I took health insurance benefits than you paid for John who is retired military and uses he military benefits for health insurance. – HLGEM Nov 6 '15 at 21:04
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    Do you mean "hourly rate for a 1099" (i.e. a comparison between an hourly contractor rate and an all-in salary for a direct hire)? Because a W2 employee generally gets the same benefits whether they are hourly or salaried. – Justin Cave Nov 6 '15 at 21:06
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    Not totally sure what you're trying to get. That said, unless I'm mistaken, benefits like health and dental insurance are usually things you're paying for with pre-tax dollars - the benefit the employer provides is usually that you get a group rate. Sometimes they contribute toward the cost, and maybe that would be taxable, but I don't think there is a formula for that. – GreenMatt Nov 6 '15 at 21:06
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    I wrote this answer to a related question which I believe will answer your question or give you what you are really looking for. – enderland Nov 6 '15 at 21:31
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    @JustinCave yes I mean 1099. edited the question. – Keltari Nov 7 '15 at 8:14

The rule of thumb for conversion from a full-time salaried position with benefits to an hourly rate as a contractor or freelancer is

( annual salary / 2000 ) X (2, 3, or 4)

Your target annual salary, divided by 2000, which is the number of working hours in the year, will give you an hourly rate. Multiplying that by 2 is intended to reflect the cost of benefits. That multiplier may be more or less depending on what your needs are and the number of dependents you have.

The figure of 2000 hours assumes that you will be working all but 2 weeks out of the year, which is a reasonable expectation for a full-time employee. As a freelancer or contractor, however, you may be very well working much less than that, in which case you may want to figure in a number of hours lower than 2000.

The trick is to set a rate that's not too low -- sometimes a rate can sound very high, but depending on what you need to earn and what you need to pay for, it can be easy to fall into a money-losing situation.

This calculation is merely a shortcut -- you'll want to do a more detailed analysis of what benefits will actually cost you before entering into a contract.

See also https://www.quora.com/Compensation/How-should-a-contractor-or-consultant-arrive-at-an-hourly-rate

  • "you will be working all but 2 weeks out of the year, which is a reasonable expectation for a full-time employee" ...it is? – JHZ Feb 11 '17 at 0:21

In the United States the rule of thumb is that salary pay rate that the employee sees only represents about half of the rate the employer has to charge a customer for their time.

For example the employee sees that their hourly rate is $20 per hour. The see that they earn $20*40*52 or $41,600 per year.

But they get 10 days of holidays, and two weeks for vacation, and a few more days for sick leave. Those hours their boss gets zero work, but they still get money in their paycheck.

Then there are:

  • benefits: social security, unemployment, health insurance, retirement program, life insurance;
  • the costs of utilities, the computer, and rent;
  • overhead for administrative support, HR, security;
  • They also need to pay for businesses development and advertising.

Therefore the employer must sell their services at a high enough rate to pay for all of this. The rule of thumb is if the employee make $20 per hour their boss has to charge $40 per hour. I have worked with some who just use the rule: Hourly rate equals annual salary divided by 1,000. So to pay somebody $41,600 you have to charge customers $41.60 per hour.

Some one man shops can make this work to their advantage if they are already retired. They don't need to put a ton of money away for retirement. They may also have another source for their health insurance coverage. That means they can underbid some of their competitors.

  • Although this doesn't answer the OP's question, it does add to the discussion and I found it valuable. – Eric Hepperle - CodeSlayer2010 May 1 '19 at 15:52

I don't know if this is a "rule of thumb" but there's a pretty cool calculator that let's you play with the numbers so you can see for yourself how one will affect you versus the other.

From the site:

The calculator below will help you compare the most relevant parts of W2 vs 1099 by looking at how the two options affect your income and tax situation, but it's important to note that this is not an exact calculation of your taxes because many other factors outside the scope of this comparison can affect your tax situation. The numbers are relevant only in relation to each other as a comparison tool.


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