Tell me about setting an hourly rate for a contractor/temp-to-perm position

So I just had a phone interview with an internal recruiter for a remote position in my field which sounds interesting, and for which I am highly qualified. The interview went well, and I expect to be scheduled for an interview with the hiring manager shortly. It’s an established global tech company with several thousand employees. I got the lead from a former boss of mine, who is their outside counsel - the position is not currently being advertised publicly.

What I didn’t expect (because I just had a very brief email exchange with my former boss) is that they would tell me that until they had budget and headcount approved for a permanent position (it’s an added position because of the demanding workload), I would have to be a temp-to-hire contractor, probably for 3 months. So they asked me what my salary expectations were as a permanent employee as well as what my hourly rate would be for the contract period.

Now I am willing to be somewhat flexible for the right position, but OTOH I am currently on Tom Scud’s employer-based health insurance, and they don’t subsidize dependents at all, so it costs almost $700/month. Plus, of course, presumably we’d be talking about no seniority, no benefits, etc. I’ve never done that before, so I want to make sure I am not selling myself short, and I have several other irons in the fire right now job, job-wise. too.

So how do I figure out what would be fair, and what other questions should I be asking (and when)?

Well, normally you would have to think in terms of total compensation. A full time job (usually) pays salary, and benefits, and employer portion of taxes (in the US, that includes SS and Medicare). While as a regular employee you might see $50,000 a year in salary, the employer is spending some higher amount ~$70,000 a year? So, what do you do with this information? The thought is that you would ask for contract pay equivalent to the ~$70,000 a year - because you are on the hook for benefits & employer taxes. The expectation would be that once you go full-time/regular you would see a drop in “pay” but total compensation would equal out.

Well, you’re tied up with professional relationships involved which makes it complicated to balance.

If nobody you knew was in the loop and it’s a 1099 contract, I charged twice as an hourly rate what I’d make if salaried-with-benefits. But I was never angling for a permanent position.

But the minimum formula would be something like:

  • Hourly rate you’d get if salaried, plus
  • 15% of the hourly rate to pay Soc Sec & Medicare taxes, plus
  • Fed income taxes calculated per hour plus
  • State income taxes per hour (if any), plus
  • 3/4s of what your healthcare will cost (or whatever proportion the prospective employer pays for full-timers) per hour

Too late to edit, but bullet #1 should really read “Hourly rate you want to take home”

Are you going to be 1099 or W-2? There is a big difference; in the latter you are someone else’s employee so they pay ½ the social security & medicare taxes; also you are eligible for unemployment as a W-2 employee where you are not as a 1099 one if it doesn’t workout for some reason. It’s also simpler from a tax-filing perspective to be a W-2 employee.

Also remember as a contractor you typically only get paid for the hours you work; that means that holidays & any days you take off are unpaid; that’s somewhere in the neighborhood of a 10% differential - based on 250 working days / year minus 25ish (or more) days off*

*8-10 holidays + three weeks PTO (or two weeks vacation & one week of sick time). Adjust as necessary for the specifics.

I generally add 30% to W-2 position to make it an equivalent 1099. So if you were expecting to make $50K/year in a salary position I’d expect to get paid $65K as a contractor.

When I did consulting back in the day, I was charging somewhere close to double what a salaried employee would make. Mostly because I could: I had specialized knowledge and was in such demand I could bill as many hours as I wanted to work. In your case, OP, you need to balance that you’re expecting to convert and don’t want to piss anyone off. That said, do not bid too low as benefits and tax stuff make an equivalent contractor hourly waaay more than a salaried position because of the risk and tax and insurance burdens you assume solely that the company does not.