It's the would-be contractor's $64,000 question: How much do I have to charge per hour to make a go of it as an independent professional? The pundits are ready with a pat answer: Divide your employment salary by 1,000, and that's your hourly rate. So if you make $50,000 as a wage slave, you need to bill at $50 an hour to make it independently.
Is it really that simple? Hardly. You have dozens of factors to consider, and you'll need at least a bit of professional help to come up with your final answer. We'll break the problem down for you and help you set fees that make sense for your situation.
You Will Pay More Taxes
When you work for yourself, you double the fun of paying the FICA tax. "You're paying the employer's share of Social Security -- that's the big difference," says Dorothy Rosen, a CPA who offers advice on BankRate.com as the Dollar Diva.
As an independent professional, you may have to pay other taxes and fees. For many contractors, these additional burdens are minimal, but be sure to ask your state and local authorities or your accountant about these levies:
- State and local taxes on business income.
- Business property and inventory taxes.
- Fees for business licenses.
"Bear in mind that half of your income is going to go away" to taxes, advises Rosen.
You Will Need to Buy Benefits
If you're like most employees, your company has provided you with a number of valuable benefits, especially insurance. As a contractor, if you can't hitch a ride on your employed spouse's plan, it's crucial that you figure in the cost of buying these services. Your fiscal and physical health depend on them. And being in business for yourself, you may need professional insurance. Add these items to your master checklist:
- Health insurance.
- Dental insurance.
- Life insurance.
- Disability insurance.
- Professional/business liability insurance.
- Retirement savings.
And don't forget about time off. Many a contractor concedes every weekend to the business and doesn't even entertain the idea of a vacation. But if you take this road, you will burn out faster than a middle manager in an 8-by-8-foot cubicle. Face the music: You will need to take time off, and this will reduce your billable hours. To save your sanity as well as your bottom line, budget for all of these time-off types:
- Sick days.
- Personal days.
- Medical/parental leave.
You Will Incur Business Expenses
Most business expenses are deductible, but they do cut into your bottom line. Before you make the leap to becoming a contractor, do your best to estimate expenses that will ultimately come out of your hourly rate. The variety of business expenses is limitless; we cover the basics here.
First, consider business startup expenses:
- Computer hardware and software.
- Office equipment and furniture.
- Business stationery and marketing materials.
- Web site programming and design.
- Initial inventory, if applicable.
Second, try to gauge your ongoing expenses, such as:
- Marketing and advertising.
- Car and other business travel.
- Business entertainment.
- Telecommunications services.
- Accounting, legal and other professional services.
- Professional books, subscriptions, memberships.
- Payments on business debt.
What Do You Do Now? Go Figure
Once you've done your homework and made your best estimates of all the applicable items above, get some professional help to put it all in perspective. See an accountant or financial planner specializing in helping small businesses. Let your advisor crunch the numbers and come up with an hourly rate that you should charge based on your estimate of billable hours per year.
Then compare this hypothetical rate to the open market's going rates. "You need to charge what the market will bear," says Rosen. "If you're going to make a mistake, err on the side of charging too much."
Wiser words were never spoken.