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.
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.
75,000 / 2000 = 37.5 (average 2000 work hours PA)
37.5 * 2 = 75
Add three 0 and 75,000
These are all expenses that have nothing do with being a contractor vs an employee. Only some of both category will need them.
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.
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?
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
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.
This should be obvious. No work, no pay. So vacation literally costs you double. Loss of time + the cost of vacation.
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.
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.