Tuesday, October 7, 2008

How to determine your hourly rate as a contractor

This is a useful bit of information I pulled off of salary.com about how to derive your hourly rate as a contractor based on your current salary:

Independent contractor fees. If you work as an independent contractor without going through an agency, you have some leeway in establishing your professional fees, but you should charge close to market. To calculate this rate, start with the prevailing full-time salary for that job. Then divide by 2080, the number of work hours in a year (2080 = 52 X 40). This is the hourly rate for your job if benefits are being paid for by the employer.

But as a contractor, you need to pay for your own benefits, as well as additional Social Security contributions, so the number needs to be higher. Salary.com uses an adjustment factor of 30 percent to convert an hourly wage for a salaried employee to an hourly wage for a contract employee. Multiply your unadjusted hourly rate by (1 + 0.3) to get your adjusted hourly rate. For example, if your unadjusted hourly rate comes out to $20 per hour, your contract rate should be $20 * (1.3) = $26.

An example shows how this works for a senior-level web designer in Kansas City. A Web designer III working in Kansas City makes $66,244. The unadjusted hourly rate for this position is $66,244/2,080, or $31.85. Adjusted by 30 percent, the contract rate comes to $41.40.

Contract fee for a Web designer III in Kansas City

Hourly rate, unadjusted$31.85
Adjustment factor30%
Hourly rate, adjusted$41.40

Source: Salary.com, May 2002.

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