Comment by prisenco

2080 hours is way over estimating the hours worked per year IMHO. The way I calculate it is something like this:

2080 hours is 8 hours a day, 5 days a week, 52 weeks per year. There is no annual leave or country-specific holidays in this calculation. I'd argue that very few workers hit 2080 hours per year, and those that do are probably minimum wage and working every hour possible just to survive.

In the UK, 25-30 days holiday is typical, plus another 9 days of public holiday, so I usually reckon on 45 weeks maximum of full-time work per year, which is 225 days or 1800 hours as an upper bound. I know in the US 10 days vacation and 10 days federal holiday and maybe a bonus couple of days for Thanksgiving and Christmas would put that around 235 or 1880 hours.

As an aside, while in the US 8 hours is normal, in the UK 7.5 is more typical (and very occasionally 7), so those 225 days are now 1687.5 hours per year. But personally, I only think in daily rate, not hourly, so I don't concern myself with that.

From the 225 nominal working days, there's also paid sickness time (maybe only 0-3 days per year for me) that I'd be paid for in a salaried job but not contracting, and other days when I might be doing work related things but can't invoice it. So, maybe I'd roll that down to 220 nominal days per year.

Then there's additional taxes. In the UK, you can either pay yourself a salary and pay both employee and employer taxes on it, or pay corporation tax on company profits and pay dividends (and the personal tax that arises). Dividends worse out slightly more tax efficient, but there's not a lot in in. On average, I'd say probably 10% more in tax compared to a salaried job. So, let's call it now 200 nominal days per year.

Then, you have to consider days you can't work - between contracts, and on occasions, I've arranged a contract for when I return from holiday and then client has asked to delay for another month to help their cashflow. It's hard to quantify this, I'd say on average I've had maybe 10-15 days per year where I could have worked, but didn't because I wasn't in contract.

There are days that you might consider free or fun as a salaried employee, such as day-time work parties, conferences (and expense accounts), all of which not only aren't free in terms of time, but also come out of your income. For instance, to attend the conference I used to go to with a previous employer would cost approx. 5 days income for tickets, flights and hotels, plus the 5 days of lost income.

You've then got all the other things that are more important in the US, but are just perks here - I don't do healthcare when contracting, because the UK's free service is good enough, but I took it as an employee when it was free and I just paid the tax liability on it. Many companies include gym memberships, snacks etc.

Other costs of contracting are accountancy fees (for me about 2 days income), insurance and indemnity (for me about half a day income), heating and electricity costs for multiple computers when remote working (it's a lot of hassle to bill it to the company just to save a bit of tax by calling it a company expense rather than paying personally), etc.

There's the risk of being out of work when you weren't expecting it - not finding a contract when the previous one ends, etc. I've even had the case where I've negotiated a contract to start when I return from holiday, and on the starting date the client asked if I could delay a month because of cashflow issues.

Taking into account all these, I'd say the 200 days should be reduced to at most 180 assuming no gaps in work, and maybe 150 assuming that you might not be working for 6 weeks.

I've actually heard several people say they assume 100 working days per year for straight salary to day-rate comparisons, assuming that while they might be able to make it work on a lower day-rate, using 100 days guarantees that it's worth doing. It's hard to get that kind of mutliplier in the UK though and 150 days is about where most contracts seem to be offered at by companies compared to salaries offered for similar roles.

150 days is also conveniently 2/3 of 225 days of maximum full time load in a salaried job, which converts to a simple 50% premium over a salaried job to cover the additional work, expenses and risks of contracting.

TLDR: add 50% to the salary for comparison, or multiply daily rate by 150.

foolswisdom 5 days ago

When I read

> My rule of thumb as a contractor is to take the hourly rate x2100 to get an equivalent full-time salary plus benefits, 401k, vacation, etc.

I thought you meant to include everything on top of salary. Reading it again after this thread, maybe you meant to this is the calculation for hourly from full time salary, and then you need to also do ("plus") a calculation for everything else.

Reply View 4 replies

prisenco 5 days ago

x2100 is base salary plus benefits, aka "total compensation."
So if this doesn't cover everything then charge a higher hourly rate for more money, don't change the multiplier.

Reply View | 3 replies
- foolswisdom 4 days ago
  
  Why? It's not obvious that an employee works 2080 hours, for example, because they take vacation (or work extra), so charging a 2100th of salary doesn't cover vacation benefit. Also, the employer will pay part of health insurance, and that isn't included in the salary number, so why would it be covered by a calculation from the salary.
  
  Reply View | 2 replies
  
  prisenco 4 days ago
  
  Once again, this relates to total comp not base salary alone. Total comp includes salary and benefits which can include vacation time.
  So it's not 1/2100th of a base salary, it's the hourly rate x2100 to get the total comp.
  Do you know what your preferred total comp is? Take the hourly rate being offered, multiply by x2100, if it meets that then it's a decent offer.
  It's a useful rule of thumb but it's just a rule of thumb. It's not meant to be perfect but I find it easy to understand and calculate so it's served me well in my ~20 years of contracting.
  
  Reply View | 0 replies
  
  ralferoo 2 days ago
  
  2080 hours is way over estimating the hours worked per year IMHO. The way I calculate it is something like this:
  2080 hours is 8 hours a day, 5 days a week, 52 weeks per year. There is no annual leave or country-specific holidays in this calculation. I'd argue that very few workers hit 2080 hours per year, and those that do are probably minimum wage and working every hour possible just to survive.
  In the UK, 25-30 days holiday is typical, plus another 9 days of public holiday, so I usually reckon on 45 weeks maximum of full-time work per year, which is 225 days or 1800 hours as an upper bound. I know in the US 10 days vacation and 10 days federal holiday and maybe a bonus couple of days for Thanksgiving and Christmas would put that around 235 or 1880 hours.
  As an aside, while in the US 8 hours is normal, in the UK 7.5 is more typical (and very occasionally 7), so those 225 days are now 1687.5 hours per year. But personally, I only think in daily rate, not hourly, so I don't concern myself with that.
  From the 225 nominal working days, there's also paid sickness time (maybe only 0-3 days per year for me) that I'd be paid for in a salaried job but not contracting, and other days when I might be doing work related things but can't invoice it. So, maybe I'd roll that down to 220 nominal days per year.
  Then there's additional taxes. In the UK, you can either pay yourself a salary and pay both employee and employer taxes on it, or pay corporation tax on company profits and pay dividends (and the personal tax that arises). Dividends worse out slightly more tax efficient, but there's not a lot in in. On average, I'd say probably 10% more in tax compared to a salaried job. So, let's call it now 200 nominal days per year.
  Then, you have to consider days you can't work - between contracts, and on occasions, I've arranged a contract for when I return from holiday and then client has asked to delay for another month to help their cashflow. It's hard to quantify this, I'd say on average I've had maybe 10-15 days per year where I could have worked, but didn't because I wasn't in contract.
  There are days that you might consider free or fun as a salaried employee, such as day-time work parties, conferences (and expense accounts), all of which not only aren't free in terms of time, but also come out of your income. For instance, to attend the conference I used to go to with a previous employer would cost approx. 5 days income for tickets, flights and hotels, plus the 5 days of lost income.
  You've then got all the other things that are more important in the US, but are just perks here - I don't do healthcare when contracting, because the UK's free service is good enough, but I took it as an employee when it was free and I just paid the tax liability on it. Many companies include gym memberships, snacks etc.
  Other costs of contracting are accountancy fees (for me about 2 days income), insurance and indemnity (for me about half a day income), heating and electricity costs for multiple computers when remote working (it's a lot of hassle to bill it to the company just to save a bit of tax by calling it a company expense rather than paying personally), etc.
  There's the risk of being out of work when you weren't expecting it - not finding a contract when the previous one ends, etc. I've even had the case where I've negotiated a contract to start when I return from holiday, and on the starting date the client asked if I could delay a month because of cashflow issues.
  Taking into account all these, I'd say the 200 days should be reduced to at most 180 assuming no gaps in work, and maybe 150 assuming that you might not be working for 6 weeks.
  I've actually heard several people say they assume 100 working days per year for straight salary to day-rate comparisons, assuming that while they might be able to make it work on a lower day-rate, using 100 days guarantees that it's worth doing. It's hard to get that kind of mutliplier in the UK though and 150 days is about where most contracts seem to be offered at by companies compared to salaries offered for similar roles.
  150 days is also conveniently 2/3 of 225 days of maximum full time load in a salaried job, which converts to a simple 50% premium over a salaried job to cover the additional work, expenses and risks of contracting.
  TLDR: add 50% to the salary for comparison, or multiply daily rate by 150.
  
  Reply View | 0 replies