Sites such as HelloBonsai have statistics on freelance pay because, after all, they handle freelance invoicing so their data is real. At first glance it seems like contractors make a considerable amount more, but in reality, after all the overhead, it’s not as much as first glance. Here’s how to get a more realistic idea of your actual income as a 1099 contractor.
Take Emily the Employee, for example. For ease of math Let’s say Emily has a W-2 salary of $100,000 (it’s easy to do percentages on a nice even multiple of 10) and I’ll assume that she gets 15 paid vacation days, 10 company holidays, medical is 100% covered by her employer, and there is a 4% 401(k) match. Assume no state income tax (Florida has something going for it!) so her take home would be about $76,000.
Lets compare this to Enzo the Entrepreneur and determine how much he’ll have to bill to get the same $76,000.
As a contractor Enzo will have to pay self employment tax. This is tax that Emily’s employer would pay on her behalf as a W-2 employee. Income tax and self employment tax are about 30% of his pay. We won’t get into deductions for this example.
Enzo pays about $300/mo for sub par health insurance (thanks politicians) as an individual. This is about $3600/year. I believe this is also a deduction, but for example purposes, let’s put that aside.
A good machine with a monitor, keyboard, and mouse cost Enzo $3000 and the lifespan is about 3 years. That’s $1000/year just for the essentials.
Enzo cannot bill 40 hours a week for 52 weeks a year, or 260 days. To have a 1:1 with Emily he needs 25 days off so he’ll work up to 235 days a year. But since he’ll also need to keep up with technology he’ll need time to learn new tools which he cannot bill for. He will also need to handle some admin tasks that go with running a business. So he ends up averaging 32 hours a week billable. That’s an 80% utilization. Keep in mind this is assuming there is no downtime between clients. So really he should be able to work for for 188 days/year or about 1500 hours.
Emily is getting $4,000/year in employer matched 401(k) contributions, Enzo will have to account for that by setting $4,000/year aside to make it a better 1:1 comparison.
Business overhead such as LLC filing, tax prep, advertising, educational courses, domain, Google suite, servers, etc will probably be about $800-1000/year.
Enzo should put up to 15% away for future expenditures such as staff so the company can grow.
Enzo’s take home is
(1500 * hourly rate)*0.7 - expenses (keep in mind this is not taking into account deductions because they will be different for everyone).
Expenses are about $12,000 so Enzo would need to bill $86/hour just to (hopefully) keep par with Emily which is $126,000 (if I’m not mistaken, the client can deduct contract services. At the corporate tax rate of 21% they are only really paying about $68/hour which is actually less than they are paying for Emily) to the client. Considering this is not taking into account the downtime between clients, the ease of terminating a contractor or simply saying “take next week off” and the cost variables of equipment (if Enzo’s machine breaks, not only does he pay for it, but he’s not able to work during this time), there is a reason contractors can charge $140+/hour.
Hopefully this opened your eyes to why contractor’s charge as much as they do - there’s a lot more to it! Let me know if I missed anything or if you just liked the article!