Full time vs IT contract

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Topic Author
doon
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Joined: Tue May 27, 2014 9:25 am

Full time vs IT contract

Post by doon »

I have a hypothetical scenario and would like boglehead feedback on that:

Full Time Employment:
Predictable numbers
Salary------ $130K
401K ---- dollor for dollor up to 6%
Health Insurance ------Above average (Lets say I pay $400/month for family)
Vacation ----- 3 weeks

Discretionary number
Bonus ------- up to $15K
Profit sharing match ----- 6% of base on Mar 31st

IT Contracting using s-corp:

Avg Hourly rate ------- $88 ( This can vary wildly from contract to contract $75 to $ 100)
Total number of hours in a year after assuming 5 weeks vacation (3 weeks for personal and 2 weeks for 4th of julys and thx giving etc) ----- 1880
Annual scorp revenue based on above rate --------- $165K


Full time offers more job protection, chance of raise, bonus, promotion. IT Contracting can be great and lousy depending on rate. There is no raise in contracting. If you need raise you need to find another contract.

1. Given the above scenario which route would you choose if income is projected for a period of lets say next 5 years?

Thanks for all the responses.
"Goal - Win the game before the need to retire"
skyvue
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Re: Full time vs IT contract

Post by skyvue »

I am an IT Director. I would tell you to take the full-time gig. The first people we cut when budgets get tight are the consultants/contractors. You also will be better positioned for higher level positions within management (if your interested in that) in the future if your "in-house". The benefit package you describe is almost identical to the one where I work. We value it at 25% of salary which means your "money" is essentially equal even without a bonus! I would only advise the contracting route if you are making significantly more in real dollars.
ralph124cf
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Re: Full time vs IT contract

Post by ralph124cf »

Generally you need 50%-100% higher hourly rate than an employee to break even with contracting as an S Corp. The S Corp. also requires another level of tax reporting, and for saving for retirement you would need to set up additional plans.

Ralph
123
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Re: Full time vs IT contract

Post by 123 »

I think it's a toss-up that pretty much depends on the specific organization. While contractors are often the first to go in a downturn some positions can endure for a long time. Some organizations have to deal with their own internal salary scale limits for employees and they have to go outside for a contractor to pay more, which they may have to to attract the talent they need for a particular technical situation or project. Some financial organization (banks/insurance/brokerage) have the same contract employees for years and years while other organizations may have a cap that says if a business unit needs a contractor/consultant for a business task they may only have them for 18 months before that slot has to be converted to an employee. As the prior poster said if you want to advance into company management you are better off as an employee. Employees will be provided training opportunities where that's usually on your own dime as a contractor. On the other hand contracting can give you a lot of exposure to different environments that can increase your value later as an employee. A contracting opportunity at a firm can be a "trial marriage" to see if they want to keep you around as an employee. But many years of contracting may make you undesirable as an employee in the eyes of a potential employer because it may look like you lack stability.
The closest helping hand is at the end of your own arm.
Steady59
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Re: Full time vs IT contract

Post by Steady59 »

I am an IT Director. I would tell you to take the full-time gig. The first people we cut when budgets get tight are the consultants/contractors. You also will be better positioned for higher level positions within management (if your interested in that) in the future if your "in-house". The benefit package you describe is almost identical to the one where I work. We value it at 25% of salary which means your "money" is essentially equal even without a bonus! I would only advise the contracting route if you are making significantly more in real dollars.
Another IT director echoing that contractors and consultants (and offshore resources) are variable labor which can be expanded as needed for unexpected, funded projects or cut back when budgets are stressed making you first on the block. I'll bet your company will pay for some training as well? Don't forget to factor that in. Your challenge will be to keep your skills fresh as you age.

Take the full time option.
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vitaflo
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Re: Full time vs IT contract

Post by vitaflo »

IMHO, your rate is too low. If you can get a $130k salary full time then you should be able to charge $125/hr as a contractor. This is especially true if you have a good network. I've never had issues getting contracts at double a salaried jobs pay. Above that it gets tough though.

If for some reason you can only get the rate you quoted I would stick to salaried employment.
newkidontheblock
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Re: Full time vs IT contract

Post by newkidontheblock »

I was a contractor for 10 years and I only had 2 clients in that time. Both of my employers had lay offs where many employees were laid off and I was able to continue. Your job security is ultimately dependent on what you do and the how valuable it is for your employer.
I did get raises as a contractor but it was not as often as employees. In my case I got health care benefits from my wife.
I did notice that rates for contractors did not go up and the trend was actually going down due to competition from foreign workers.
I became a full time employee at an awesome tech company which had great salary and benefits. I had a lot of flexibility to work from home as well.
However I had to work longer hours than I ever did and there was no end in sight. I was in technical sales the compensation had huge variations.

I recently became a contractor again. In my first month at my new contract there were employee lay offs.
I was a bit tough to walk away from financial security but I wanted more control of my life and work less.
For me going back to contracting was not a financial decision. My salary and bonus were so high as an employee that I don't expect to make the same compensation year after year as a contractor.
As a contractor your can put in $52000 in your Solo 401K. There are other options to put even more money.
If you work overtime as a contractor you will get paid for it where as employees can work long hours without appropriate returns.
Taxes are another big benefit. My wife works so when I became an employee I paid AMT every april for the past 5 years. There was no way to avoid it.
You can take as much time off as possible if you can afford it. You can write off business expenses.
If you want to write, do public speaking, try creating products/startup etc, you will have a lot more flexibility.

If you can keep up with technology, have a big enough nest egg and can deal with uncertainity contracting may be a good fit for you.
Networking is extremely important as your next job may come from it. Being able to identify new technology trends, investing time to learn them may be a way to get a better rate as well.

Good Luck.
sfnerd
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Re: Full time vs IT contract

Post by sfnerd »

I'm a VP of engineering and I'd like to echo the others: take the FT in this scenario.

I used to own a software engineering consulting firm (just 5 engineers), and really your consulting rates should be about double the FT rates to cover taxes, overhead, etc. Like the above poster said, for a 130k job, you should be getting around 125/hour.

Consulting/contracting can be great, but it is temporary by its nature, and you need to be compensated for that. At our company we just cut (virtually) all contractors from our budget, while adding FTEs.
freddie
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Re: Full time vs IT contract

Post by freddie »

I think the salary is going to work out slightly higher if you assume you get some bonus and profit sharing and subtract out the higher contractor costs (s-corp fees, half of ss) but it is close. The one plus of contracting is that you can put 52k or so into an 401(k) instead of 26.5 and you can pick a good plan provider.

I agree with others that your contracting rate is low. 100/hr should be your low end and you should be looking for 125+.
curious2050
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Re: Full time vs IT contract

Post by curious2050 »

Some points to consider in addition to the salary/net profit comparison.
Possible advantages of working on contracts:
1. You get paid hourly - so if you need to work overtime to meet a deadline then you are paid for it. In a lot of FTE positions you are not compensated for the extra time you put in to complete the work. May not make a difference if you have a full time position at a company that considers extra time and gives comp off in return.
2. You can contribute considerably larger amounts to retirement accounts and also have the flexibility to choose the custodian and funds with low fees.
3. You have more flexibility - on choosing the projects/technologies you work on before you sign the contracts, training courses (example if there is a hot skill in the market and you would like to be trained on it you can do that at your expense (tax deductible). When working as FTE - not sure if the employer will spend that on your training if it does not align with the organization's goals), choosing the hours you work, time offs,

Possible advantages of working as full time employee:
1. A little more certainty than contracting that you will have your next pay-check and the amount it will be for.
2. Opportunity to move up in the management (if it is something you would like).
3. Benefits like health insurance, discounted life insurance.

Also, you may get the feedback on the company culture through your network and see if it matches your career goals.
KyleAAA
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Re: Full time vs IT contract

Post by KyleAAA »

I'd say in this scenario, it isn't even close: the full-time position wins handily. The only exception is if you REALLY value those extra 2 weeks of vacation every year (which is reasonable). Your total compensation for the full-time position is ~ $147K per year including 401k match and profit sharing. $13k isn't enough of a raise to make contracting even worth looking at, and that's not even taking into account the cost of health insurance or your cash bonus.
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Watty
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Re: Full time vs IT contract

Post by Watty »

As a contractor you would also be paying double the social security and medicare taxes which would make the deal even worse.

If you were laid off as an employee then you would likely get some sort of severance package and unemployment.
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Rob5TCP
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Re: Full time vs IT contract

Post by Rob5TCP »

Wow - full time gig;
I am an independent contractor for most of my adult life and I would not change it.
However, my hourly is more than twice what the comparable pay is per week (based on 40 hours).
Not that I am in my mid 50's; I have dropped to 3 days a week most of the year and 2 days in the summer.

Given your statistics there is no comparison.
As a business you need liability insurance or a LLC (or sub s corp); pay half of SS and medicare;
your own health insurance. There are reasons why the independents have to charge AT LEAST 50% more
and frequently twice as much.

You have one good choice and one GREAT one - take the gig as an employee.
Topic Author
doon
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Re: Full time vs IT contract

Post by doon »

Thanks everyone for your advice and responses. It was greatly appreciated.

So the hypothetical scenario turned real and the the employer came back with great offer of additional 10K and extra bonus. So I have decided to take full time. Based on your responses even 130K was looking good compared to contracting. But I think 140K seals the deal.

I am gonna miss 50K in solo 401k though. I been doing that for last couple of years and it was great. This will be the last year to do that based on my employment so far.
"Goal - Win the game before the need to retire"
learningLady
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Re: Full time vs IT contract

Post by learningLady »

hi read the posts. I am independent contractor. Can please some body shed light on 50K solo 401. I am not aware of it.
davebarnes
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Location: Berkeley, Denver, Colorado USA

rate too low

Post by davebarnes »

Contractor rate should be 2-3x salaried.
You have to pay more in taxes.
You have to pay more for health insurance.
You get paid for fewer hours. Go to training? On your dime, not theirs.
You get no severance.
You get no 401k.

All from someone who has been a contractor since 1996.
A nerd living in Denver
freddie
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Re: Full time vs IT contract

Post by freddie »

vandanagoel wrote:hi read the posts. I am independent contractor. Can please some body shed light on 50K solo 401. I am not aware of it.
The employee gets to put in 17.5k. The company can contribute 20-25% of the salary (based on the structure of the company) as a match up to 52k/employee. You can do the same thing with a SEP-IRA but you need more income as there is no employee contribution.
nordsteve
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Re: Full time vs IT contract

Post by nordsteve »

I've done contract and FT work and agree with the others that you should be able to double your FT salary in contracting. If these are your two choices then the FT job wins.
Topic Author
doon
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Re: Full time vs IT contract

Post by doon »

Not sure how many folks have mentioned that FTE salary should be equal to 2 times contracting income. I been in IT and in a few cases I been able to find the rate Client was paying the vendor. Even if I work directly work for Client I will not make double the FTE salary.

For example in my current gig the Client pays vendor 234K per year. Vendor gives me $100 per hour. So the vendor is keeping about $17/hour.
Last edited by doon on Fri Jul 11, 2014 9:33 pm, edited 1 time in total.
"Goal - Win the game before the need to retire"
Spirit Rider
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Re: Full time vs IT contract

Post by Spirit Rider »

doon wrote:Not sure how many folks have mentioned that FTE salary should be equal to 2 times contracting income. I been in IT and in a few cases I been able to find the rate Client was paying the vendor. Even if I work directly work for Client I will not make double the FTE salary.

For example in my current gig the Client pays vendor 234K per year. Vendor gives me $100 per hour. So he is keeping about $17/hour.
I couldn't agree more. All this talk about 2X and davebarnes quoting 2-3X just don't ring true. Sure if you have specialized skills that are highly in demand, you can get those kind of mark ups. Then I don't really consider you an independent contractor, but a true consultant.

However, I have been in Software Engineering on both sides of the equation for 35 years. With the sole exception of the GoGo years in the late 90s, the premium for independent contractors has been in the range of 1/3 - 2/3 over FTE salaries. I have worked for and been an independent contractor for small 20 person companies to MegaCorps with six figures for employees. In fact after the dot com bust and the recent financial meltdown it drifted towards 1/4.

Now with that said, the OP still proboably needs $100 - $120/hour to justify independent contractor status.
learningLady
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Re: Full time vs IT contract

Post by learningLady »

freddie wrote:
vandanagoel wrote:hi read the posts. I am independent contractor. Can please some body shed light on 50K solo 401. I am not aware of it.
The employee gets to put in 17.5k. The company can contribute 20-25% of the salary (based on the structure of the company) as a match up to 52k/employee. You can do the same thing with a SEP-IRA but you need more income as there is no employee contribution.
We have SEP IRA account with vanguard. I will contact vanguard for solo 401 account.
newkidontheblock
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Re: Full time vs IT contract

Post by newkidontheblock »

vandanagoel wrote:
freddie wrote:
vandanagoel wrote:hi read the posts. I am independent contractor. Can please some body shed light on 50K solo 401. I am not aware of it.
The employee gets to put in 17.5k. The company can contribute 20-25% of the salary (based on the structure of the company) as a match up to 52k/employee. You can do the same thing with a SEP-IRA but you need more income as there is no employee contribution.
We have SEP IRA account with vanguard. I will contact vanguard for solo 401 account.
vandanagoel

Fidelity and Schwab also offer solo 401K. Vanguard's Solo 401K has some limitations as compared with fidelity and schwab and their website for 401K is not intuitive.
Fidelity and Scwab began offering Solo 401K in mid 2000's and it took Vanguard many years to offer such a plan.
Vanguard Solo 401K does not allow loans and does not accept some type of outside contibutions.
I have Solo 401K accounts at all 3 institutions and I chose Vanguard because I prefer Vanguard funds and lack of fees make it much easier to dollar cost average.

Other thing worth mentioning is that Solo 401K require you to file annual 5500 form once you assets exceed a certain amount. I don't think SEP has any such requirement.
placeholder
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Re: Full time vs IT contract

Post by placeholder »

I would not use Vanguard for the i401k as the don't allow rollovers (so you couldn't combine the existing SEP) and they don't allow buying Admiral shares or ETFs in the account.
Topic Author
doon
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Re: Full time vs IT contract

Post by doon »

I think most flexible options are provided by e-trade. This info may be 2 years old now. But when I was looking at it I found its solo 401k having loan option (up to 50% of 401k assets limited to 50K), incoming IRA rollovers, roth 401k option. Loan option can be useful for down payments without losing tax deferred space.

The only downside is: access to vanguard or fidelity mutual funds will be expensive. If you are okay with ETF's then e-trade can be a great option.

I myself have solo 401k with fidelity.
"Goal - Win the game before the need to retire"
bobby21
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Re: Full time vs IT contract

Post by bobby21 »

I have a vanguard solo 401k. So far I never needed to roll it over. Are we saying that Vangaurd does not allow rollovers? What is the exit plan then? I have been consulting for 3 years and may go back to FT later. So will I have to keep the money in Vanguard forever?
bobby21
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Re: Full time vs IT contract

Post by bobby21 »

Spirit Rider wrote:
doon wrote:Not sure how many folks have mentioned that FTE salary should be equal to 2 times contracting income. I been in IT and in a few cases I been able to find the rate Client was paying the vendor. Even if I work directly work for Client I will not make double the FTE salary.

For example in my current gig the Client pays vendor 234K per year. Vendor gives me $100 per hour. So he is keeping about $17/hour.
I couldn't agree more. All this talk about 2X and davebarnes quoting 2-3X just don't ring true. Sure if you have specialized skills that are highly in demand, you can get those kind of mark ups. Then I don't really consider you an independent contractor, but a true consultant.

However, I have been in Software Engineering on both sides of the equation for 35 years. With the sole exception of the GoGo years in the late 90s, the premium for independent contractors has been in the range of 1/3 - 2/3 over FTE salaries. I have worked for and been an independent contractor for small 20 person companies to MegaCorps with six figures for employees. In fact after the dot com bust and the recent financial meltdown it drifted towards 1/4.

Now with that said, the OP still proboably needs $100 - $120/hour to justify independent contractor status.

I have never ever heard of anyone getting 2x in a contracting role compared to FT in Wall St IT in 15 years, unless their FT offers are really low. Over the years I have been offered or contacted by recruiters for both FT and consulting positions with estimated compensation, and the markup has been pretty consistent at around 30%.
placeholder
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Re: Full time vs IT contract

Post by placeholder »

bobby21 wrote:I have a vanguard solo 401k. So far I never needed to roll it over. Are we saying that Vangaurd does not allow rollovers? What is the exit plan then? I have been consulting for 3 years and may go back to FT later. So will I have to keep the money in Vanguard forever?
Vanguard doesn't accept rollovers into the plan so that SEP IRA couldn't be rolled in to combine or avoid problems with backdoor Roth.
Topic Author
doon
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Re: Full time vs IT contract

Post by doon »

bobby21 wrote:
Spirit Rider wrote:
doon wrote:Not sure how many folks have mentioned that FTE salary should be equal to 2 times contracting income. I been in IT and in a few cases I been able to find the rate Client was paying the vendor. Even if I work directly work for Client I will not make double the FTE salary.

For example in my current gig the Client pays vendor 234K per year. Vendor gives me $100 per hour. So he is keeping about $17/hour.
I couldn't agree more. All this talk about 2X and davebarnes quoting 2-3X just don't ring true. Sure if you have specialized skills that are highly in demand, you can get those kind of mark ups. Then I don't really consider you an independent contractor, but a true consultant.

However, I have been in Software Engineering on both sides of the equation for 35 years. With the sole exception of the GoGo years in the late 90s, the premium for independent contractors has been in the range of 1/3 - 2/3 over FTE salaries. I have worked for and been an independent contractor for small 20 person companies to MegaCorps with six figures for employees. In fact after the dot com bust and the recent financial meltdown it drifted towards 1/4.

Now with that said, the OP still proboably needs $100 - $120/hour to justify independent contractor status.

I have never ever heard of anyone getting 2x in a contracting role compared to FT in Wall St IT in 15 years, unless their FT offers are really low. Over the years I have been offered or contacted by recruiters for both FT and consulting positions with estimated compensation, and the markup has been pretty consistent at around 30%.
May be what people are referring to are really short term 3-6 month contracts where you are brought in for a very specific skill set. I think the type of contracting that is involved in IT is more to do with day to day business as usual work. That's why the mark up is only 30-35% because contractor is not taking benefits (401K, health insurance etc).

Having said that it seems from this thread and peoples comments, that in almost all the cases where the mark up is only 30% for a contractor it is not worth being a contractor. The only advantage I see is solo 401k. It seems one should be a contractor only because one doesn't have a choice of full time or the contracting rate is 60-70% over full time salary.
"Goal - Win the game before the need to retire"
nepats
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Re: Full time vs IT contract

Post by nepats »

doon wrote:I have a hypothetical scenario and would like boglehead feedback on that:

Full Time Employment:
Predictable numbers
Salary------ $130K
401K ---- dollor for dollor up to 6%
Health Insurance ------Above average (Lets say I pay $400/month for family)
Vacation ----- 3 weeks

Discretionary number
Bonus ------- up to $15K
Profit sharing match ----- 6% of base on Mar 31st

IT Contracting using s-corp:

Avg Hourly rate ------- $88 ( This can vary wildly from contract to contract $75 to $ 100)
Total number of hours in a year after assuming 5 weeks vacation (3 weeks for personal and 2 weeks for 4th of julys and thx giving etc) ----- 1880
Annual scorp revenue based on above rate --------- $165K


Full time offers more job protection, chance of raise, bonus, promotion. IT Contracting can be great and lousy depending on rate. There is no raise in contracting. If you need raise you need to find another contract.

1. Given the above scenario which route would you choose if income is projected for a period of lets say next 5 years?

Thanks for all the responses.
In this scenario: It depends :shock:

It depends because there are lot factors to consider besides the hourly rate like your targeted industry, ability to take risks, changing with the times, age/family commitments.

I have worked as FTE in the past, but have been doing full time contracting IT work for the last 9 years. I can't imagine going back to an FTE position at this point. There are lot of great benefits to contracting like ability to make more $$, choosing own clients, expanding your network, not dealing with office politics and staying focused on work. There are obvious downsides, like others have mentioned. I truly believe that that FTE status does not mean better job protection Some of my friends have been at the same client for last 10+ years while FTEs have been downsized or contracts have been turned over. If you are good at your job, you will find work!

Few tips:
- There are ways to "adjust" hours depending on the contract type; ie. Fixed price vs T&M to account for holidays and vacation time.
- There are raises in contracting! Few of my GOV clients gave annual Cost of Living raises automatically or after negotiating. Always ask for more every year :)
- Seems obvious, but depending on your industry shoot for the longest contract even at a lower rate.
- At your current salary range, target at least $95-100/hr or more.

I took similar pay to switch to contracting years ago. I started even lower than your current rate at $50/hr in 2003. I am no where near that rate anymore :mrgreen: I can't think that by waiting for raises or promotions, I would have been more financially secure. Feel free to PM if you have specific questions.
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vitaflo
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Re: Full time vs IT contract

Post by vitaflo »

Spirit Rider wrote: I couldn't agree more. All this talk about 2X and davebarnes quoting 2-3X just don't ring true. Sure if you have specialized skills that are highly in demand, you can get those kind of mark ups. Then I don't really consider you an independent contractor, but a true consultant.

However, I have been in Software Engineering on both sides of the equation for 35 years. With the sole exception of the GoGo years in the late 90s, the premium for independent contractors has been in the range of 1/3 - 2/3 over FTE salaries. I have worked for and been an independent contractor for small 20 person companies to MegaCorps with six figures for employees. In fact after the dot com bust and the recent financial meltdown it drifted towards 1/4.
Like most things, it's variable based on demand, where you live, what you do, who you know, etc. But I don't know anyone for whom 2x wasn't the going rate and nobody balks at it. Obviously YMMV.
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