Transitioning from full time salaried to independent contractor

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
camper1
Posts: 110
Joined: Wed Jan 01, 2014 11:39 am

Transitioning from full time salaried to independent contractor

Post by camper1 »

My wife is in the process of transitioning from a full time salaried position to part-time independent contractor for her current employer. She would have the same job responsibilities, but wants fewer and more flexible hours. She has already spoken to her employer and they are very interested in keeping her on as an independent contractor after she retires from full time at the end of 2021.

Our question is, how does she determine a fair hourly rate as a contract worker vs what she was making as a full time employee? The factors I see to consider are more freedom and flexibility and control for her (which would mean willing to work for less per hour), but her employer is no longer paying benefits, SS taxes and other expenses (that would mean requiring to earn more per hour)

Is there an accepted formula that an employer may use when offering an hourly wage to a former full time employee that would account for the employer no longer paying benefits? Or is there certain percent increase from her hourly pay as an employee that she should expect doing the same work as a contract employee?

Has anyone been in this situation(either as employer or employee) and have a recommendation on how to negotiate a fair hourly rate?

Thanks in advance
Nyarlathotep
Posts: 140
Joined: Thu Jan 17, 2019 1:24 pm

Re: Transitioning from full time salaried to independent contractor

Post by Nyarlathotep »

camper1 wrote: Wed Oct 20, 2021 1:22 pmIs there an accepted formula that an employer may use when offering an hourly wage to a former full time employee that would account for the employer no longer paying benefits? Or is there certain percent increase from her hourly pay as an employee that she should expect doing the same work as a contract employee?

Has anyone been in this situation(either as employer or employee) and have a recommendation on how to negotiate a fair hourly rate?
I switched from full-time salaried to independent consultant about 8 years ago, and there was no specific formula that I used to come up with my hourly rate. I just used my knowledge of the industry and of the prevailing salaries and hourly comp for a position such as mine, and then I adjusted it (upwards) based on how badly I knew my former employer wanted—and, honestly, needed—to retain me as a consultant. IIRC, my hourly rate as a consultant was about 25% higher than my hourly rate (based on my base salary at that time, not including bonuses). I also negotiated a monthly "retainer", equivalent to 10 hours of my time. All of this was contingent upon my negotiating power, which I judged to be quite strong given the importance of the full-time role I was leaving and my history with the company.
exodusNH
Posts: 10344
Joined: Wed Jan 06, 2021 7:21 pm

Re: Transitioning from full time salaried to independent contractor

Post by exodusNH »

camper1 wrote: Wed Oct 20, 2021 1:22 pm My wife is in the process of transitioning from a full time salaried position to part-time independent contractor for her current employer. She would have the same job responsibilities, but wants fewer and more flexible hours. She has already spoken to her employer and they are very interested in keeping her on as an independent contractor after she retires from full time at the end of 2021.

Our question is, how does she determine a fair hourly rate as a contract worker vs what she was making as a full time employee? The factors I see to consider are more freedom and flexibility and control for her (which would mean willing to work for less per hour), but her employer is no longer paying benefits, SS taxes and other expenses (that would mean requiring to earn more per hour)

Is there an accepted formula that an employer may use when offering an hourly wage to a former full time employee that would account for the employer no longer paying benefits? Or is there certain percent increase from her hourly pay as an employee that she should expect doing the same work as a contract employee?

Has anyone been in this situation(either as employer or employee) and have a recommendation on how to negotiate a fair hourly rate?

Thanks in advance
Whatever she currently makes plus 30% is a reasonable starting point. The employer is avoiding their share of FICA, the unemployment contribution, one fewer person covered by workmans' comp, and savings on health insurance and 401k matches / record keeping. Plus if they decide to not renew her contract, she can't pull unemployment from them.

And if she's going to be working from home, they don't need to provide working space. My SIL works for Fidelity and precovid worked from home 4 days a week. Fidelity estimated they save $10K/yr on office-related expenses with that arrangement.
cadreamer2015
Posts: 1536
Joined: Wed Apr 08, 2015 1:52 pm
Location: North County San Diego

Re: Transitioning from full time salaried to independent contractor

Post by cadreamer2015 »

I made this transition from full time salaried to part-time independent contractor about 6 years ago. My employer initially offered me 80% of my previous effective hourly rate before bonus, which I thought was ridiculously low and didn't respond to their offer. They eventually came up to 100% of my previous rate, which I thought was still far too low but accepted rather than walk away with nothing. I had calculated that they "should" be paying me about 125% of my previous rate to account for social security tax, health insurance, vacation pay and bonus.

After a year I negotiated an increase to 125%, and after another year negotiated another increase to 200%. I finally retired completely after 5 1/2 years, at which point I had negotiated the pay up to 300% of my previous effective hourly rate. But I was a specialized individual contributor with deep experience it would have been hard to replace. It helped along the way that the stock market had gone up essentially 100% from the time I went to part-time until the time I fully retired, so our retirement investments are far higher than they were 6 years ago.

So I don't think there is any good rule of thumb. The employer may well try to low ball your wife, as my previous employer did to me. My basic advice is to get as much as you can and be prepared to walk away.
De gustibus non disputandum est
mikejuss
Posts: 2833
Joined: Tue Jun 23, 2020 1:36 pm

Re: Transitioning from full time salaried to independent contractor

Post by mikejuss »

I've experienced this transition myself.

A rough calculation: if your wife makes $100,000 a year, add 30% to that number, making it $130,000. Divide $130,000 by 40 hours, making $3,250, and divide that number by 50 weeks, making $65 an hour. Adjust as needed.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
RyeBourbon
Posts: 1219
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Transitioning from full time salaried to independent contractor

Post by RyeBourbon »

mikejuss wrote: Wed Oct 20, 2021 1:59 pm I've experienced this transition myself.

A rough calculation: if your wife makes $100,000 a year, add 30% to that number, making it $130,000. Divide $130,000 by 40 hours, making $3,250, and divide that number by 50 weeks, making $65 an hour. Adjust as needed.
This. Although start at a 50% addition and let them negotiate it down.
Retired June 2023. AA = 55/35/10
j9j
Posts: 385
Joined: Sat Oct 24, 2015 1:46 pm

Re: Transitioning from full time salaried to independent contractor

Post by j9j »

mikejuss wrote: Wed Oct 20, 2021 1:59 pm I've experienced this transition myself.

A rough calculation: if your wife makes $100,000 a year, add 30% to that number, making it $130,000. Divide $130,000 by 40 hours, making $3,250, and divide that number by 50 weeks, making $65 an hour. Adjust as needed.

This is good rule of thumb for normal corporate employee roles. I would personally use 40% but of course can go higher depending on negotiation.
User avatar
JoeRetire
Posts: 15381
Joined: Tue Jan 16, 2018 1:44 pm

Re: Transitioning from full time salaried to independent contractor

Post by JoeRetire »

camper1 wrote: Wed Oct 20, 2021 1:22 pm Our question is, how does she determine a fair hourly rate as a contract worker vs what she was making as a full time employee?
That depends on lots of factors.

Does the company no longer need full-time coverage for the role, or will they be hiring someone else to cover the hours that she doesn't?

Sometimes a company will be willing to give an employee the equivalent of their salary in hourly pay, sometimes not. Sometimes a company will give the employee the same rate that they must pay someone else to fill the remaining hours for the role.

If the company desperately needs her services, even with her hours reduced, they will be willing to pay more.
This isn't just my wallet. It's an organizer, a memory and an old friend.
mikejuss
Posts: 2833
Joined: Tue Jun 23, 2020 1:36 pm

Re: Transitioning from full time salaried to independent contractor

Post by mikejuss »

RyeBourbon wrote: Wed Oct 20, 2021 4:11 pm
mikejuss wrote: Wed Oct 20, 2021 1:59 pm I've experienced this transition myself.

A rough calculation: if your wife makes $100,000 a year, add 30% to that number, making it $130,000. Divide $130,000 by 40 hours, making $3,250, and divide that number by 50 weeks, making $65 an hour. Adjust as needed.
This. Although start at a 50% addition and let them negotiate it down.
Clever. Good luck, OP!
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
User avatar
vitaflo
Posts: 1905
Joined: Sat Sep 03, 2011 3:02 pm

Re: Transitioning from full time salaried to independent contractor

Post by vitaflo »

Every contractor I know (including myself) does 2x salary. To make the calculation easy, if you were a salaried employee at $100k/yr, then you'd bill as a contractor at $100/hr. This may be lower if you are transitioning from employee to contractor within the same company, because the risks are lower. But typical independent contractors make 2x.

Remember you have to make up more than just benefits and SE tax. You (usually) have expenses for your own equipment, software, taxes/accounting, liability insurance, etc, plus the risk you take on as a contractor (you'll be the first to get cut). All of this needs to be compensated.
mikejuss
Posts: 2833
Joined: Tue Jun 23, 2020 1:36 pm

Re: Transitioning from full time salaried to independent contractor

Post by mikejuss »

vitaflo wrote: Wed Oct 20, 2021 4:31 pm Every contractor I know (including myself) does 2x salary. To make the calculation easy, if you were a salaried employee at $100k/yr, then you'd bill as a contractor at $100/hr. This may be lower if you are transitioning from employee to contractor within the same company, because the risks are lower. But typical independent contractors make 2x.

Remember you have to make up more than just benefits and SE tax. You (usually) have expenses for your own equipment, software, taxes/accounting, liability insurance, etc, plus the risk you take on as a contractor (you'll be the first to get cut). All of this needs to be compensated.
May I ask--by "contractor," do you mean a freelance employee at a large corporation? Calculating against twice your full-time salary seems a little high. But maybe I'm shortchanging myself!
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: Transitioning from full time salaried to independent contractor

Post by JBTX »

I've seen anywhere from 25% to 100%. 25% probably doesnt fully cover all benefits, including PTO, and liability / E&O insurance. I would say something in the 30% range covers all though. However some contract companies bill out contractors at twice their base pay rate.
123
Posts: 10415
Joined: Fri Oct 12, 2012 3:55 pm

Re: Transitioning from full time salaried to independent contractor

Post by 123 »

I would agree that twice her former salary is a good number to aim for, particularly if she has a lot of time with the company and/or deep knowledge of their processes and procedures.

Benefit as an employee can easily add 30% to the employers cost over payroll alone so that's a bare minimum starting point.

She needs to charge enough so that the former employer doesn't burden her with as many mundane tasks.

The more the former employer has to pay her the more they will appreciate her services and treat her well. She should charge, on a full-time equivalency basis, more than the equivalent (salary and benefits) being paid to the person at the company who is responsible for monitoring her work.

She should also develop other customers, that increases her perceived value to each of them.
The closest helping hand is at the end of your own arm.
User avatar
prudent
Moderator
Posts: 9085
Joined: Fri May 20, 2011 2:50 pm

Re: Transitioning from full time salaried to independent contractor

Post by prudent »

Talked to my neighbor who went through this. He said that his strategy was not what most people would do, but anyway....

His company had fixed billing rates based on job class (not based on salary, but on job class). He wanted to change from full-time to part-time contractor, but was concerned the company would tell him no, then go get someone in a lower job class to cut costs. His company is sensitive to contractor costs if they are considered to be "high" and he preferred to be kept on for a long time vs. getting more money per hour but only until the inevitable "why are we paying this guy so much when we could get an internal person for less?" . So he figured out what the billing rate was for the work he did, and asked for the same amount. The projects he worked on would see no change in costs, the contracting agency got their cut out of that amount, and he got the rest. It turned out to be about 30% more than he was earning (per hour) as an employee, but of course no medical coverage, no PTO. For him it was enough and defused any reason for the company to balk at his proposal. He's been doing that for four years and expects he can continue until he wants to retire.
User avatar
3CT_Paddler
Posts: 3485
Joined: Wed Feb 04, 2009 4:28 pm
Location: Marietta, GA

Re: Transitioning from full time salaried to independent contractor

Post by 3CT_Paddler »

It’s whatever the employer is willing to pay based on need and skill level.

There are significant advantages to employers to use contract employees that you need to consider. As a contractor it’s easier to stop paying you if the work is not there. They don’t have to pay benefits or SS/Medicare.

1.2x would be a bare minimum. 2x would be my starting point.
GeMoney
Posts: 353
Joined: Sun Jul 28, 2019 11:15 am

Re: Transitioning from full time salaried to independent contractor

Post by GeMoney »

A lot depends on your local market. I'm in California and was a consultant for 13 years and in my role I've come across a lot of independent contractor agreements. I generally recommend taking the full time salary and remove the last 3 digits and that is an approximate hourly rate. For example if you're currently making $100,000/year, I would start out with approx $100/hour and go from there.
User avatar
cockersx3
Posts: 711
Joined: Sun Apr 17, 2016 3:55 pm

Re: Transitioning from full time salaried to independent contractor

Post by cockersx3 »

vitaflo wrote: Wed Oct 20, 2021 4:31 pm Every contractor I know (including myself) does 2x salary. To make the calculation easy, if you were a salaried employee at $100k/yr, then you'd bill as a contractor at $100/hr. This may be lower if you are transitioning from employee to contractor within the same company, because the risks are lower. But typical independent contractors make 2x.

Remember you have to make up more than just benefits and SE tax. You (usually) have expenses for your own equipment, software, taxes/accounting, liability insurance, etc, plus the risk you take on as a contractor (you'll be the first to get cut). All of this needs to be compensated.
This is consistent with my experience as well. I have worked alongside contractors that were brought on to support me at my level, and I have seen the hourly rates that are usually requested. This advice is spot on - whatever my base salary was in terms of an hourly rate, contractors with relatively equivalent experience cost approx 2x that.

This made sense to me for the reasons others have stated - ie, that the employer is paying for a level of hiring / firing flexibility with contractors that do not exist with FTE's, and that the contractor is now paying for payroll taxes / heath insurance / bonuses / etc. I plan to go this route as well once I move on from being an FTE in a few years.
feh
Posts: 2011
Joined: Sat Dec 15, 2012 10:39 am

Re: Transitioning from full time salaried to independent contractor

Post by feh »

If (and that's a big if), benefits equal roughly 50% of gross pay as an employee, then:

former annual salary / 1000 * 3/4 = hourly rate

is a good place to start.

ie. $100K salary = $75 hour
User avatar
3CT_Paddler
Posts: 3485
Joined: Wed Feb 04, 2009 4:28 pm
Location: Marietta, GA

Re: Transitioning from full time salaried to independent contractor

Post by 3CT_Paddler »

feh wrote: Wed Oct 20, 2021 8:37 pm If (and that's a big if), benefits equal roughly 50% of gross pay as an employee, then:

former annual salary / 1000 * 3/4 = hourly rate

is a good place to start.

ie. $100K salary = $75 hour
Unless you are paid very little with gold plated benefits, typical benefits might add up to 15-30% of your salary. The major ones are health insurance, 401k matching and PTO/holidays.

If you also include what an employee pays for SS/Medicare (7.7%), you get to base salary rate + [base x .07 (SS/Medicare)] + [base x .04 (401k match)] + [base x .10 (varies for medical)] = 1.21. That does not include some other benefits for things like disability, dental... possibly round up to 1.25-1.3.

The policy around vacation and holidays is a critical piece. Does the contract employee get either of those? That is an additional 6% of the total compensation - which might make it closer to 1.3-1.35.

There should be a premium for the employee to accept this arrangement - which is where the 2.0 number comes from.

For the other poster who mentioned dividing by 1000... that lines up well with the 2x approach. $100,000/(2080 work hours in a year) = $48/hr. $48*2 = $96/hr as a contractor - roughly equivalent to 2x base.
User avatar
vitaflo
Posts: 1905
Joined: Sat Sep 03, 2011 3:02 pm

Re: Transitioning from full time salaried to independent contractor

Post by vitaflo »

mikejuss wrote: Wed Oct 20, 2021 4:38 pm
vitaflo wrote: Wed Oct 20, 2021 4:31 pm Every contractor I know (including myself) does 2x salary. To make the calculation easy, if you were a salaried employee at $100k/yr, then you'd bill as a contractor at $100/hr. This may be lower if you are transitioning from employee to contractor within the same company, because the risks are lower. But typical independent contractors make 2x.

Remember you have to make up more than just benefits and SE tax. You (usually) have expenses for your own equipment, software, taxes/accounting, liability insurance, etc, plus the risk you take on as a contractor (you'll be the first to get cut). All of this needs to be compensated.
May I ask--by "contractor," do you mean a freelance employee at a large corporation? Calculating against twice your full-time salary seems a little high. But maybe I'm shortchanging myself!
I mean an independent contractor someone that receives a 1099. "Freelance employee" is an oxymoron. If you are transitioning from a W2 employee to a 1099 contractor within the same company, 2x could be considered high as there is less risk for both parties involved, but around 2x is fairly typical. I've been billing that with dozens of companies over the past decade. Never had an issue until I tried to go beyond 2x, then there was push back.

Note if you're a contractor going through a vendor (as a W2 of the vendor) to be placed at a company then your rate will be reduced because the vendor will take a cut. Most megacorps do not deal with 1099 contractors anymore (for liability reasons). But the vendor will charge the megacorp as much as they possibly can for your time which is still usually 2x salary.
cadreamer2015
Posts: 1536
Joined: Wed Apr 08, 2015 1:52 pm
Location: North County San Diego

Re: Transitioning from full time salaried to independent contractor

Post by cadreamer2015 »

Note if you're a contractor going through a vendor (as a W2 of the vendor) to be placed at a company then your rate will be reduced because the vendor will take a cut. Most megacorps do not deal with 1099 contractors anymore (for liability reasons). But the vendor will charge the megacorp as much as they possibly can for your time which is still usually 2x salary.
I went through this towards the end of my career as an independent consultant. Last October I had to become a W2 employee of a vendor to continue working for my Fortune 500 client. It was a big pain to get "qualified" - I had to dig up my 40 year old Masters diploma and send them a photo of it, even though I had been doing the work for over 10 years.

The upside was that the vendor paid the employer share of Social Security and I also got qualified for sick days.
De gustibus non disputandum est
Topic Author
camper1
Posts: 110
Joined: Wed Jan 01, 2014 11:39 am

Re: Transitioning from full time salaried to independent contractor

Post by camper1 »

Thanks for all the replies. Very useful information!
Post Reply