Printed 2017/08/17 07:36PM

Salaried employee vs contractor

By James Serra, 2011/11/02

Are you a salaried employee looking to switch to a W-2 or 1099 contractor? (For an explanation of W-2 and 1099, click Consultants: 1099 or W-2?)  If so, what hourly pay rate would you need to at least match your salary?

When trying to decide the equivalent pay between being a Permanent/Salaried/Full-Time employee (“Perm”) compared to being a W-2 or 1099 Contractor/Consultant (“Consultant”), here are some things to keep in mind:

Some other differences to keep in mind that are not related to pay:

Note that if you are working as a consultant for a consulting company, but are being paid a salary (NOT as a W-2 or 1099), then I am considering you a “Perm”.  Also note that a W-2 contractor is many times brought in to supplement a staff and therefore shares some non-pay related characteristics of a perm employee (i.e. travel, laptop, work hours, type of work, work hours flexibility).

Early in my career, when I was working as a salaried employee for a consulting company (a “Perm”), I was pretty upset when I found out what they were billing the client.  That hourly rate was much higher than what I was making (a 70% markup).  When I complained to the consulting company, they said I can earn more money by switching to a W-2 employee, but I would miss out on the benefits of being a perm (paid vacation/holidays, higher medical premiums, paid bench time).  I did the math and determined those benefits required an extra $4/hr.  When I asked how much more an hour I would get W-2 and they said $12/hr, I switched immediately to W2 (a “Consultant”).  And what they fail to tell you is if you are on the bench for longer than a week or two, they can you (not to mention the next project they line up for you might be one you don’t care for).

So let’s look at a detailed example for a perm and a consultant:

Perm: Your salary is $90k, with a 10% yearly bonus.  You pay $300/m for health insurance.  Your company matches up to 3% of your salary for 401k (for which you need to contribute 6% of your salary to the 401k), and you get a little company stock each year worth about $1k.  So your “true” salary is around $100k.

Contractor (1099):  Your rate is $60/hr.  Since you only get paid when you work, subtract out 80-hours for 2 weeks of vacation, 80 hours for 10 holidays, and 40 hours for sick/miscellaneous.  Assume $600/m for health insurance and another $100/m for dental.  Don’t forget 7.65% in self-employment tax.  We will say no bench time or overtime work, and you are not paying for any training.  Finally, we will say the tax deductions you get being 1099 save you $5k per year.  Doing the calculations, your true salary is around $100k.

So there you have it.  Of course there were a lot of assumptions, but it shows that if you make $90k as a perm, which salary surveys shows is a little on the high side of most DBA’s, you would only have to earn $60/hr as a 1099 contractor for the equivalent, which is very much on the low side.

The bottom line is you can usually make a lot more money as a W-2 or 1099 Contractor/Consultant than a salaried position, but there are additional risks and the expectations will be higher (more on this in another blog post).

So why are companies willing to pay more for contractors?  Here are the top reasons:

More info:

To Payroll or Not- Hiring Contract vs. Salary Employees

8 Good Reasons to Become a Contractor

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