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You need to factor in the following: Taxes PTO Vacation Equipment Certifications Insurance Costs of hiring people under you Mortgage/Rent Gas/Transit Costs Emergency funds

Essentially as a contractor you should be making at least 2.5x what an employee would make. So if an employee is being paid $120,000 as is in a similar position as you you should be getting paid $300,000/year so you can make the same salary + a little more for the added costs of being a contractor.

What are these extra costs you might be wondering they are: Business registration, licensing, certification, life insurance, private medical/health/dental insurance, taxes, vacation, technology, bills, travel, parking, emergency funds, liability, general and umbrella insurance, car maintenance, car fuel, carl detailing and regular cleaning, house maintenance (yard, inspections, upgrades, insurance, etc.) or rent, payroll if you get your own subcontractors, overtime pay (if you end up working 60 hours a week you need to add in the costs of this. If your employer wants you to work more than that you can renegotiate your rates to accommodate), etc.

As an employee there is about 50% or more costs that you do not see as an employee. It is known and expected that contractors will be paid way more than employees as contractors take on 100% of the risks.

I think 2.5x is way too much. The rule I've seen is XX,000/year as salary is roughly equivalent to XX/hour as a contractor. Here are the details on some of the mentioned items:

PTO: if you get 3 weeks out of 52 paid, then account for 6% more to cover that

Taxes: Employer portion of payroll taxes (let's say 8% in US) and B&O taxes that your state will likely want (1-1.5% of revenue)

Downtime: If it takes 2-3 months/year between projects, add 30% to your rate to cover that. Some may see this as a bonus time to recharge, but you are still likely be working on business development and marketing at least for a bit.

Licensing and Business registration: depends on your local requirements. In my city it's $300/year for both. This presumes you register an LLC and not just have a sole proprietorship.

Medical insurance: You can get an inexpensive bronze plan or high deductible plan directly from insurers (this comes with HSA you can contribute to) or get coverage from your partner (if available). I used to be paying around $400 for a bronze plan.

Umbrella insurance: Not too expensive, but may require coverage raised on your auto and homeowners insurance. Let's say $100/month, although I'd advise having it anyway. Parking and auto: depends on whether you work remotely or not; let's say $200/month.

Total: 45% on top of your salary rate + $1000/month; if you are comparing with 100k salary, then you'll need 60% more to cover additional expenses.

Note that most of these expenses can be expensed, so they will be subtracted from your before tax income, thus reducing your taxes. You can also include car-related and home-office related expenses, which will further reduce your taxes.

I may be missing something, but it should give you a rough idea on what to expect. This is all based on personal experience.

So that comes out to be 2X the salary. This is calculated by the shorthand rule of doubling hourly pay and then adding 3 zeroes at the end.

I get back my original salary with this calculation.

75,000 / 2000 = 37.5 (average 2000 work hours PA)

37.5 * 2 = 75

Add three 0 and 75,000

> car maintenance, car fuel, carl detailing and regular cleaning, house maintenance (yard, inspections, upgrades, insurance, etc.) or rent

These are all expenses that have nothing do with being a contractor vs an employee. Only some of both category will need them.

If you work at home, while those things would need to be done anyway, should be piped through your business to some extent since your business is taking advantage of those resources.

2.5x is the golden rule. You will need to double the salary to cover additional expenses (some of which weren't mentioned, like employer's side of FICA in the US, time spent on sales because contracts end, legal, etc.) you will incur. The .5 of that equation is your profit. Because you're running a business.

3x though if you can land 12 months or greater contracts id say 2.5 is just about acceptable.

Depends on what you can expense via your company as business expenses :-)

>What are these extra costs you might be wondering they are...

Almost all of these just seem like my normal expenses. Why are any of these aside from business registration, private medical and payroll "extra" costs?

They are "extra" compared to being an employee. At least in the US when you become a contractor you no longer have employer subsidized healthcare. I imagine that Canadian employers might provide complementary insurance.

I specifically excluded medical and a few other things as reasonable. The list of things that don't seem like extra expenses, but rather just plain old expenses, to me are:

licensing, certification, life insurance, vacation, technology, bills, travel, parking, emergency funds, general and umbrella insurance, car maintenance, car fuel, carl detailing and regular cleaning, house maintenance (yard, inspections, upgrades, insurance, etc.) or rent

> licensing, certification

You're a business now and this is upkeep. Business expense. You would receive training and licensing under normal circumstances through your job.

> life insurance

This is provided as a benefit by most businesses to their employees. Talk to your HR. If you're working for yourself, you pay for it now.

> vacation

This should be obvious. No work, no pay. So vacation literally costs you double. Loss of time + the cost of vacation.

> technology

Computer equipment to do the actual work. Nobody will provide this to you for free.

> bills, travel, parking

Nobody will reimburse you for these expenses. If you have to visit the client on-site, they're on you.

> emergency funds

You must keep 3 month's of salary at a minimum sitting in a bank account at all times. This is a cost of doing business. There are ups and downs, don't expect contracts to come in immediately one after another. It doesn't happen.

> general and umbrella insurance

This should be obvious, you bear 100% of the cost of all types of insurance.

> car maintenance, car fuel, carl detailing and regular cleaning

If you use a car to get to the client, well, this is obvious.

> house maintenance (yard, inspections, upgrades, insurance, etc.) or rent

If your home is your office, all of these are now business expenses to some extent even if you had to do them before. You're spending double the time in your house. That will increase upkeep, electricity, etc.

In the US we don't have healthcare provided by companies as a law, some companies do provide ok insurance, but its far too expensive for what you get. Put that money in a medical savings account, and hopefully by the time you're old you'll live somewhere with decent healthcare.

The main thing is to work out how you will set up as a contractor and tax efficiency - is there not a Canadian self employed contractor forum / org like the UK PCG Professional Contractors Group.

The overhead rate for an employee is I think a lot more than 50% I have heard 300% for the UK for bog standard tech companies - the us might be a little lower due to the way heath care is structured

Really high end RnD (world leading ) can go well over 500% - labs and specialist shops do cost a lot.

You typically do not need any kind of business registration if you're okay with a sole proprietorship and are working under your own name.

This is a terrible idea for numerous reasons. You will be personally liable for any defects in the work. If you get dragged into court, it can ruin you for life. You will be unable to take advantage of tax benefits that would accrue to you if you incorporated. Various business-only services would be inaccessible to you (like a business bank account, lines of credit, etc.). Also, good luck getting health care in the US as an individual.

I didn't say it was a great idea... just that a registration is not necessary to conduct business. In American common (and civil) law, the right to conduct business belongs to the individual as well as the corporation.

Depends on location and tax law also a PLC limits your liability - that's why sole traders and partnerships can be so deadly.

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