The Old Joel on Software Forum: Part 4 (of 5)

Is 16% increase good?

Is W2 rate + 16%, good for corp-to-corp contract to cover all expenses I will be taking over such as the additional tax, etc.?

Rob
Wednesday, May 5, 2004

If you're going to ask arbitrary questions, I myself prefer: "Is blue a good color for a wall in a house?"

Brad Wilson (dotnetguy.techieswithcats.com)
Wednesday, May 5, 2004

No, it's not a good rate.

Wednesday, May 5, 2004

While tempted to agree with Brad, the basic model I see is to divide your yearly income by 1000
$40,000 / 1000 = $40 This is your base rate per hour. If they want to give you that +16% it may not be a bad deal at all.

Also, assuming you are in the US, the 16% is reduced by 7.5% in additional taxes. Then you lose about $6,000/year for insurance on a family, and all other expenses now become yours.

Don't let people fool you with the "everything is a write off." While true, you can write off much more, there are no 100% write-offs. So, if you spend $100, you may get to write off $16-$25. If you like that deal, send me $10,000 and I will send you back $2500.

Where you get the big bang is in retirement. You can put 25% of your income up to $40,000 per year into retirement. A great way to pad the account if you did not start early in saving for retirement (NOTICE TO ALL UNDER 35 YEAR OLDS - it may seem like you have forever but start saving for retirement. Start now and you will be well set toward early retirement. )

MSHack
Wednesday, May 5, 2004

Well, I think Brad is being a bit of a prick because while your question is vague, you did provide enough info for some suggestions.

Providing you are in the US, you are going to be matching your FICA contributions (up to around 90K) so there's 7.5% out the window. Tack on another few percent to handle the federal unemployment (FUTA).

What about state unemployement? Are there city or state taxes to pay?

Remember that you must pay your own sick and vacation time. Let's say you get 5 days sick time and 2 weeks of vacation. That's effectively 3 weeks of unpaid time that you have to roll into your rate. That means that 6% of the year you can expect to not be working.

What about insurance? Unless you have a working spouse, expect to get royally screwed on insurance rates.

Just adding FICA + vacation/sick time gets us to 13.5%. Tack on the various state taxes and I'll bet you are at at least 15% increase in expenses.

Although you may not realize it, you are a business. As such, your business must make a profit. Do you want to grow the business in the future? Are you going to have to cover professional fees such as accounting and legal? What about buying equipment? Software licensing, etc. All of this also has to be rolled into the rate.

Unless you current salary is something like $200K a year, I don't see a 16% increase over your W-2 rate as all that great. It might be enough to live on, but you have to look at this as more than just earning the same salary. You've got to be prepared when the client dumps you and you need to survive for a while.

Whatever
Wednesday, May 5, 2004

Dividing your yearly income by 1000 will most definitely not give you an hourly rate. Try 2000 or 2080 if you want to be even more accurate.

Anonymous
Thursday, May 6, 2004

Yeah, there are about 2000 working hours in a year, but you'll be spending some of them on admin, marketing, stuff you can't bill for, and then there are expenses.

A.T.
Thursday, May 6, 2004