Going back to work as a 1099 at 1.38x W2 hourly rate

[beege]

My spouse and I have been FIRE for a good 6 months and now my spouse decided to go back to work on a very part-time basis (about 8 hours a week). Previously she worked half time (20 hours/wk) but wanted to work even less, since we don't really need the money anymore, so this feels like a good amount of work for her.

She's negotiating the hourly rate with the employer right now and I think the number is the employer came up with is reasonable but it's not as high as I've seen others recommend for contracting on these forums and I'm trying to figure out what we are missing. The rate they are coming back with is about 1.38x her W2 hourly rate.

This seems reasonable to me when we did the math accounting for the following:
W2 hourly rate
PTO accrual rate
401k match
Annual bonus
Healthcare costs provided by employer
Professional development allowance
Additional 7.65% tax for self-employment

It seems to me that the 1.38 number is fair and it's a win-win for both her and the company because she gets more flexibility at the same rate and the company gets a better deal for her time (I realize there are more costs that the save which are not included in the above).

Are we missing anything major? We are not trying to be greedy since we don't need the money but I'm not understanding how some people come up with 2x or 3x their W2 hourly rate.

[dandarc]

There's also a risk premium (contractors usually easier to fire / non-renew) should be included and a "low-hours" premium - good luck to employer finding someone as good as your wife while only offering 8 hours per week. Plus the hassle-factor with running your own business and getting that accounting and taxes right.

I mean, I have no doubt that number makes sense only on the exact benefits and other costs that are known basis, but that's only part of the story.

ETA: and obviously this is optional for your wife, so whatever deal they come up with is certainly workable for her.

[JLee]

It's probably in the ballpark for a straight up hourly conversion calculation, but when the alternative is likely hiring from a contracting company or another firm, it's almost certainly underpriced.

Back when I made ~$25/hr doing IT stuff, my company billed me out at $120/hr.

[dandarc]

It's probably in the ballpark for a straight up hourly conversion calculation, but when the alternative is likely hiring from a contracting company or another firm, it's almost certainly underpriced.

Back when I made ~$25/hr doing IT stuff, my company billed me out at $120/hr.

Woof - need another contracting firm if they're taking that much.

[bacchi]

I've always been skeptical of the 2x (or 3x) the W2 salary. There's no way, when I was making $100k/year W2, that a company was going to pay me $200/hr. Even an agency wouldn't charge that much.

[yachi]

My first job out of college was lower paid than most competitors, so they used to send around a figure with all the extra costs the employer had to cover - time off, 401k, social security taxes.  From what I remember it brought a $43K job to $75K or so, so maybe you're in the right ballpark.  I have a few thoughts:

1) Make sure your divisor is correct.  A W2 worker accrues their holiday, sick, and vacation time over a calendar year, so it's (PTO)/(yearlyworkhours-PTO) not PTO/yearlyworkhours

2) I'd charge a discounted rate for the 8 most satisfying hours I used to work in a week, but I would want a large premium for the 8 least satisfying hours I used to work in a week.

[cangelosibrown]

It seems like a good relationship, finding someone who is willing to let you work that little is rare. On the other hand, from their perspective, finding someone who is willing to work that little is probably even more rare. When thinking about salary, it is worth thinking about what the employer is getting out of 8 hours a week vs the previous 20.

 I think there's a lot of jobs where 8 hours has 90% the value of 20 or even 40 -- there's some set of specialized tasks that they need you to do, there's not a lot of them, but they'd be difficult for them to find someone else to do (and would possibly be impossible without hiring the sort of person who would only accept a full time job).This is essentially the job I have, and in a perfectly efficient marketplace, my employer would probably happily pay me 2/3 my salary for 1 day a week of work. But that's not the world we live in, so I pretend that I have 40 hours of work to do, and my boss pretends he doesn't know otherwise.

[jeninco]

I've always been skeptical of the 2x (or 3x) the W2 salary. There's no way, when I was making $100k/year W2, that a company was going to pay me $200/hr. Even an agency wouldn't charge that much.

Unless I'm missing something, $100,000/2000 hours in a year (assuming two weeks of vacation: this is 50 weeks * 40 hrs/week) works out to $50/hour. So doubling that would be $100/hour, which seems more reasonable, since they're no longer paying you benefits, you have to find your own health insurance, yada yada.

[beege]

Thanks for the perspective everyone, she decided to go for it. Such a flexible work with such low hours is a rarity so we decided it was a good deal.

[JLee]

It's probably in the ballpark for a straight up hourly conversion calculation, but when the alternative is likely hiring from a contracting company or another firm, it's almost certainly underpriced.

Back when I made ~$25/hr doing IT stuff, my company billed me out at $120/hr.

Woof - need another contracting firm if they're taking that much.

I was full time staff for an MSP, not contract.

[yachi]

I've always been skeptical of the 2x (or 3x) the W2 salary. There's no way, when I was making $100k/year W2, that a company was going to pay me $200/hr. Even an agency wouldn't charge that much.

Unless I'm missing something, $100,000/2000 hours in a year (assuming two weeks of vacation: this is 50 weeks * 40 hrs/week) works out to $50/hour. So doubling that would be $100/hour, which seems more reasonable, since they're no longer paying you benefits, you have to find your own health insurance, yada yada.

$48.08 an hour would also be a $100k/year job, as the vacation weeks would be paid vacation.  It would show up on a weekly pay stub as $1,923.20, and 1.6 hours of vacation earned.  A W2 employee with a $50/hour pay and 2 weeks of vacation is making $104K/yr, which is close enough.  Either way bacchi's number of $200/hr representing a 4x multiplier on the hourly wage seems out of place.

[yachi]

Health insurance in particular is an item that not only doesn't scale well with income, it doesn't even always share the same cost and benefit for W2 employees making exactly the same hourly wage working for the exact same employer.  So why should you apply a flat 2x multiplier to your W2 salary? Here's an example:


In 2023 the average employer contribution for all health care plans (single coverage) was $7,034.  For family coverage it was $17,393.

If we say our W2 person has 2 weeks of vacation and 8 holidays, then these health care contributions are earned over 1,936 hours.  So health care for a W2 employee costs the employer $3.63 per hour for a single employee, and $8.98 per hour for an employee with a family.  That could be anywhere from  7% to 18% for an employee making $50 an hour.  It could be a 14% to 36% for an employee making $25 an hour.  Perhaps the employer has employees using a spouse's health insurance.  In that case, there is a 0% cost, but the employer can't well agree to pay that person more upfront because they won't be able to adjust the pay if their spouse loses coverage.

But that's the cost to the employer.  The benefit to the employee can be different.  For example, to the married employee with a working spouse, it's only the difference in cost between the offered insurance and what can be purchased from their spouse's employer.  To lower-income workers, it might be the difference between the offered insurance and that available on the marketplace if only the employer didn't offer insurance.  This is still all through the W2 structure.