05 Oct 2014

Employee vs Contractor Incomes for Sofware Developers

A friend recently told me that they’d received a job offer that was 12% more than their current employee salary. Then they told me it was contract work.

This spurred a conversation about income that software developers should understand.

Employee salary != Contractor Income

Let talk about being an employee first (US-Centric) and attribute a dollar value to everything:

Employee Income:

+ Salary $90,000/yr
+ Company pays half of your social security tax and medicare tax (6.25% + 6.25% + 1.45% = 13% ~= $12,000/yr)
+ Healthcare benefits ($500+/mo, ~= $6,000/yr)
+ Sick days (5/yr @ $400/day ~= $2,000/yr)
+ Federal Holidays (10/yr @ $400/day ~= $4,000/yr)
+ Paid Time Off (10 days @ $400/day ~= $4,000/yr)
+ Company 401k retirement matching (up to 3% of salary/yr ~= $2,700/yr)
+ One software conference paid per year
  + 2 days paid * $400/day = $800
  + Flight = $400
  + Hotel  = $500
  + Conference Ticket = $400
+ No equipment cost for employee

= $123,425/yr Equivalent contractor income to $90,000 as employee

$90,000 is worth $123,425/yr when accounting for benefits.

So roughly, we can add 35% value to an employee income to get their contractor income.

Contractor Income

Now imagine it from the other side if this friend accepted the contracting job for a 12% raise over their employee salary:

+ Income $100,800
- Healthcare $6,000
- Sick Days  $2,000
- Holidays   $4,000
- PTO        $4,000
- Retirement matching $2,700
- Conference budget $2,100
- Equipment/office/cell/laptop $5,000+

== $75,000 equivalent employee salary

Yep, that’s an employee salary of $75,000 after paying for your own benefits.

Conclusion

Taking that job would be a loss of $15,000/yr, even with it being 12% more than employee salary, after factoring in lost benefits.

More things to consider

We did not take into account that employment can be more stable, depending on the laws of that state. We also ignored the benefits of contracting, such as running your own business, possible geographical flexibility, and excitement of working on new projects. These personal growth and lifestyle preferences can be thrown in as weighted values. How much are they worth?

Credit

Many of these calculations are based on http://rakkar.org/ContractPayCalculator.html. Thank you for clearly laying out the details of what needs to be accounted for in determining employee vs contractor income. To see a clojure re-implementation of the Js source of that website, checkout this gist:

xargs.io