How much more should I be taking in as a consultant to make as much as i would as an employee after taxes?

Question

If I'm working as a consultant (paying my own taxes) instead of being a regular employee (where your employer takes taxes out for you), how much more should I be earning in gross income?

Answer 1

Your taxes are pretty much the same except that as a consultant, you'll pay both halves of social security, 15.3% instead of 7.65%. To make up for that, you'd have to make about 8% more.

The other thing you have to look at is benefits - as a consultant you don't have any, so things like vacation and sick time, and any insurance, are on your nickel. That could be substantial - only you can calculate what that's worth, though.

Depending on what kind of consulting you are doing, you might have expenses that are deductible as a consultant that aren't or are limited as an employee.

Answer 2

When you are working as an independent contractor (consultant), you have a number of expenses that you wouldn't have as an employee.

You have to pay an additional amount of social security and medicare tax to offset the share that would have been paid by your employer. You also have no company paid benefits as a contractor and the cost of medical insurance alone can be significant.

Also, will you be using your own equipment to do the work? Things like computers, printers, telephones, etc. all cost money, and if you are providing these, you need to factor this into your hourly rate. If the company you are contracting with requires you to have liability insurance, you also need to recover the cost of this.

Finally, there is an element of risk that should be factored into your fee. As a contractor, you have no guarantee of steady employment, and there is always the risk that you will get paid late or not paid at all.

Most professional consultants typically charge between 1.5 and 3 times their "direct labor cost". For example, if you were making $30 per hour as an employee, you should be charging somewhere between $45 and $90 per hour as a consultant.

Steady, long-term assignments from a reliable company would normally be billed at the lower end of the scale, while shorter-term or "on-call" assignments for lesser known companies would probably be billed at the higher end of the scale.

Answer 3

At least 7.65% more. You'd have federal withholding, and 1/2 of the social security and medicare taxes taken out of your paycheck anyways, so if you are earning $25 per hour right now as an employee, you know you'd have to make at least that much on your own. But by working for yourself, you are responsible for the 1/2 of social security and medicare taxes that are paid by your employer. Your 1/2 of those taxes is 7.65% and your employer's 1/2 is also 7.65%, so that is at least how much more you'd have to get per hour. But you also have to figure into your gross all the expenses that you'd have so that you end up with a net of 7.65% more than earning as an employee.

Answer 4

It depends on your tax bracket but I like to have at least 25% on hand for taxes and related expenditures.