An update to the original article written 7/5/2012.
Interviewing for a new job can be exciting. There’s the anticipation of change — a new office, a different set of responsibilities and a new team. You might feel empowered to grow in your line of work and build up experience that can propel you further in your career.
However, there’s one tricky part of the interview process for those interested in contract or freelance opportunities: figuring out how much money you should ask for. You don’t want to present a lowball offer but asking for too large a sum can ruin your chances of securing the job. An educated guess might suffice in certain financial transactions in your life. But when it comes to your earnings, it pays to be strategic and precise. There’s a simple formula that companies use to calculate freelance and contract workers’ hourly rates. Understanding this formula can help you adjust your financial perceptions, so you know exactly what to ask for when you step into the job interview.
Running Through the Basics
Before reviewing the exact formula that recruiters and businesses use when working with contract and freelance workers, ensure you have the basic information needed. If you’ve worked in an hourly position, you might be familiar with some, if not all, of these terms, as they are common expressions used in contract work.
First, let’s get into the differences between a W-2 and a 1099 form. Both documents help you determine the amount of income taxes you’ll pay. The main distinguishing factor is whom these documents are meant for. A W-2 is intended for employees, while a 1099 is the document necessary for independent contractors.
A common word we use in the recruiting world is ‘burden,’ which refers to the cost a company incurs to employ a person. A burden could contain payroll, taxes, unemployment and other related costs.
Ultimately, to calculate how much you should ask for during a job interview for a contract position you just need one number. This figure represents the number of hours a worker is paid in a calendar year. You can find the number of hours worked by doing this simple math:
52 weeks in a year x 40 hours per week = 2,080 hours
Now that we’ve covered the basics, let’s move on to the good stuff.
Hourly Wage Calculator
Workers can determine their hourly rates with two approaches. The exact equation they use depends on the type of tax form they have, either W-2 or 1099. For a long-term contract on W-2 status with a workweek of 40 hours, the calculations go as follows:
Full-time annual salary / 2,080 = contract hourly rate
Let’s use an exact salary example. If an employee makes $80,000, the hourly rate is $38.46 per hour.
For a long-term contract on 1099 status, the calculations are a little different. This equation takes burden into account:
(Full-time salary + burden) / 2,080 = contract hourly rate
Calculate Your Pay
Let’s say this company spends approximately 20% of a worker’s earnings on health insurance, benefits and other components that can be categorized as burdens. We’ll use the same $80,000 example as shown above. In this instance, with the burden considered, the employee’s hourly rate would be $46.15.
The major reason the hourly wage of someone who is dealing with a 1099 form is higher than someone with the same salary with a W-2 form is due to economic conditions related to taxes. Workers with W-2s typically have a lower take-home pay because taxes come directly out of their paychecks. However, contract workers who receive 1099s do not have income taxes taken from their paychecks and therefore owe taxes on their earnings.
Using this formula can help you calculate your financial needs and increase the quality of the conversations you’ll have with your hiring manager. Instead hesitating after an employer’s question regarding wages, you can come equipped with numbers and data.
If you’re a right-brained individual who is put off by numbers, this hourly wage calculator system might throw you off. However, when you plug in the numbers, the equation practically solves itself. It’s that simple!
Now that you understand how to calculate take-home pay, you should have no trouble when asked how much you should earn. The breakdown of hourly pay can be somewhat convoluted, especially when faced with a 1099 form. However, the right hourly wage calculator can clear things up significantly.
Working with Profiles
Profiles is a unique staffing firm that specializes in marketing, creative and technology employment. Since 1998, we have served the needs of our clients and talent by matching the best candidates with the best companies across the country. We can answer any question you have about the interview process, including what hourly rates you should ask for. Get in touch with a recruiter today to find the right contract or freelance position that fits your qualifications and meets your needs!
