Rule of thumb to compare contract vs permanent

mcbert

I'm trying to work out a realistic minimum daily rate I would need to earn to match my current annual take home pay from my current permanent job.

So an example with numbers I picked out of the air (this is not what I earn)...

Can anyone correct the following:

Permanent:
If I now earn 50k gross.
Then +5% employer contribution to pension = 52.5k
Add health insurance and other bits n pieces => 54k gross

vs Contract:
250 max work days per year.
But maybe I'm not employed all year round, say 2-3 months between contracts, and/or holidays thrown in = 165 actual work days
Say 4k/year contracting costs. 4k/165 = 25/day costs

So 54k / 165 days = 327/day + 25/day =350/day minimum.

This assumes overall the taxes paid as a permanent vs as a contractor is roughly similar.

Sound reasonable? Or are my calculations all wrong? I just want to roughly estimate the jobs/rates available, not exact numbers

Thanks.

Stheno

What's the 4k contracting costs?

A simple rule of thumb is 1.5 times gross permanent

mcbert

Stheno wrote: »

A simple rule of thumb is 1.5 times gross permanent

Thanks.

But over how many days per year? What number do people typically use?

I've seen 220 days/yr mentioned in a few places, but that wouldn't include any time between contracts, so thats why I went with 3months for holidays or breaks between, each year.

50k/yr x 1.5 / 165days = minimum daily rate of 450
But
50k/yr x 1.5 / 220days = minimum daily rate of 340

moycullen14

I'd say most contractors aren't on the bench for 3 months per year - unless it's by choice, in which case it's not a fair comparison.

I'd budget on 220-230 days per year. Most contracts should last 1 year +. You can schedule holidays, etc. for down time.

If you choose to take 3 months off every year, employers won't be too happy with you.

If you are forced to take 3 months off a year then you are obviously doing something wrong (inappropriate skill set, maybe?)

If you are running a limited company (lots of clients insist on this) then I'd say the 4K cost, whilst a little high, is fair enough.

Get a decent accountant. A good one will save you money, a bad one....(shudder). You know what they say 'If you think good professional advise is expensive, try cheap professional advise and see what it costs.....'

1.5 times permie rate sounds about right. 50K salary 'equates' to 340 per day for 220 days. A reasonable mid-range contract should bring in that.

Graham

220 days p.a. is quite reasonable. Unless you have an incredible specialised skill set, there's no reason to expect to be 'between contracts' for 3 months of the year other than by choice. If you do have such an incredibly specialised skill set then your daily rate should reflect that (and the gaps between). Most contractors I know schedule holidays for the end of their current contracts (assuming they have a new contract lined up for their return).

In your calculations, don't forget to include an allowance for training/education. Additional training/certifications is one of the ways you can continue to increase your value/earning potential. A figure of €2k - €5k p.a. is not unreasonable, maybe more if you intend to attend any of the conferences/events relevant to your position.

You are making hard work of your comparisons. Go and find the 2015 salary/rates surveys and see what daily rate your role commands, Morgan McKinley publish one every year as do several other agencies. From those figures you can work out what you could reasonably expect to be earning as a contractor.

seamus

Standard permanent workers get 4 weeks holidays in a 52-week year, making their working days 48 x 5 = 240 days.

But standard now in most modern companies is 5 weeks holidays, plus a blind eye turned to the odd half day and sick day here and there. Include in that short bursts of downtime between contracts and that's where budgeting for 220 days comes from. That's not being greedy, it's being pragmatic.

In your sums remember you will be taxed differently - you pay more PRSI and income tax than a PAYE worker. So at a base level a €50k gross for a PAYE worker has the same take-home as a €53k gross for someone self-employed. So base your calculations on that.

mcbert

Graham wrote: »

Most contractors I know schedule holidays for the end of their current contracts (assuming they have a new contract lined up for their return).

Thanks. I've been wondering about this. I do have a family to consider, so wouldn't it be reasonable to take holidays like permanent employees? i.e. just book it in advance with your manager. I know I wouldn't get paid for such holidays, but the process to take them would be the same. That sound normal? Other threads here suggested this at least.

Graham wrote: »

You are making hard work of your comparisons. Go and find the 2015 salary/rates surveys and see what daily rate your role commands, Morgan McKinley publish one every year as do several other agencies. From those figures you can work out what you could reasonably expect to be earning as a contractor.

I can see what rates I might get from those salary surveys alright, but what I need to do is decide if it is worth it.

moycullen14

mcbert wrote: »

Thanks. I've been wondering about this. I do have a family to consider, so wouldn't it be reasonable to take holidays like permanent employees? i.e. just book it in advance with your manager. I know I wouldn't get paid for such holidays, but the process to take them would be the same. That sound normal? Other threads here suggested this at least.



I can see what rates I might get from those salary surveys alright, but what I need to do is decide if it is worth it.

If you are trying to base the decision purely on financial terms, it's going to be very difficult to compare like for like. You might earn more today but what about the future? There is no corporate progression available to you so you may/will miss out on the financial benefits of that.

For example, if you progress in a company to PM level, that may involve promotions, increments, bonuses, etc and suddenly you find yourself earning twice as much as a contractor. This happens frequently in 'traditional' companies.

Unless you're careful and manage your career ruthlessly, you could find yourself significantly worse off in the future than if you had climbed the corporate ladder.

I know there are counter examples to all this - but they only go to prove my point: Financial only comparisons are very difficult.

The reasons to go contracting, IMHO, are not financial. They are the freedom to do what you want, flexibility about where and when you work, disconnection from office politics, independence, etc.

mcbert

moycullen14 wrote: »

If you are trying to base the decision purely on financial terms, it's going to be very difficult to compare like for like. You might earn more today but what about the future? There is no corporate progression available to you so you may/will miss out on the financial benefits of that.

For example, if you progress in a company to PM level, that may involve promotions, increments, bonuses, etc and suddenly you find yourself earning twice as much as a contractor. This happens frequently in 'traditional' companies.

Unless you're careful and manage your career ruthlessly, you could find yourself significantly worse off in the future than if you had climbed the corporate ladder.

I know there are counter examples to all this - but they only go to prove my point: Financial only comparisons are very difficult.

The reasons to go contracting, IMHO, are not financial. They are the freedom to do what you want, flexibility about where and when you work, disconnection from office politics, independence, etc.

Thanks. Yep, I'm conscious of all this, but I do have a particular plan, and becoming a contractor, if I do it at all, is not intended to be a long term thing.

So, I'm a little confused by this 1.5 multiplier suggested before...

Is this saying that
A) contractors should reasonably expect to take home roughly 50% more (ignoring other costs like different tax/accountant/training etc) than an equivalent permanent, or
is it saying that a contractor needs to multiply by x1.5 so that the *same* take home pay can be achieved?

If the latter (B), what are the other costs that give rise to a 50% overhead?

But if the former (A), what I'm looking for is a minimum rate to maintain the same take home pay, so surely I could ignore the 1.5 multiplier to calculate the minimum rate? All I would need to do is adjust for other costs like different tax rates, training, an accountant etc. No?

Graham

It's not a 50% overhead.

Theoretically, contracting is less secure than permanent employment, you don't get holiday pay, sick pay, training/education, promotions, mortgages (easily) etc etc so contracting rates accordingly attract a premium over permanent rates. Personally I'd say 150% - 250%+

Why on earth someone would consider contracting to take home the same pay as an equivalent permanent employee is beyond my comprehension so I won't comment other than to suggest it's nuts.

You may get some more useful answers if you can explain why you want to move into contracting and what your particular expertise is.

As an aside, the period immediately following an economic downturn is generally a great time to start contracting. All the previous fair-weather contractors have long since left the market for the perceived security of a permanent role, demand is high in an expanding economy and supply is relatively short.

moycullen14 wrote: »

The reasons to go contracting, IMHO, are not financial. They are the freedom to do what you want, flexibility about where and when you work, disconnection from office politics, independence, etc.

I'd disagree with the 'non financial' part. A good contractor will earn significantly more than his/her permanent counterpart. Freedom is only partial as you're still constrained by the market or specific contract.

You are correct about the career part, a contractor is entirely responsible for his/her own career progression. Like anything it takes time/money/effort.

mcbert

Graham wrote: »

Why on earth someone would consider contracting to take home the same pay as an equivalent permanent employee is beyond my comprehension so I won't comment other than to suggest it's nuts.

I'm not, just looking for a baseline for comparison.

Graham wrote: »

You may get some more useful answers if you can explain why you want to move into contracting and what your particular expertise is.

A software engineer with 10+ years of experience. Current employment has changed recently, so I'm considering my options. I also plan on moving in a year or two, so I'm thinking I've 12-18 months to fill.

Graham

mcbert wrote: »

I'm not, just looking for a baseline for comparison.

A software engineer with 10+ years of experience. Current employment has changed recently, so I'm considering my options. I also plan on moving in a year or two, so I'm thinking I've 12-18 months to fill.

Double your current annual salary then divide it by 220. There's a starting daily rate.

Take that daily rate and check it against current contract jobs being advertised and last-years surveys.

http://www.morganmckinley.ie/article/2016-it-salary-survey-benefits-guide-contract-interim

14ned

mcbert wrote: »

But maybe I'm not employed all year round, say 2-3 months between contracts, and/or holidays thrown in = 165 actual work days

Don't forget unexpected not earning days caused by sickness of you or another, strikes, weddings, car failure etc.

I've been a remote working contractor since 2009 and I typically lose ten days a year to unexpected non earning days with is many thousands of lost euro for me. As a permie, that cost usually falls on the employer.

mcbert wrote: »

Say 4k/year contracting costs. 4k/165 = 25/day costs

My typical overheads are 9-10k/year. 3k-4k goes on training/conferences (I present at two international conferences per year). 3k on rental of a small office. 600 on accountant's fees for end of year, and about the same on liability insurances. The rest goes on server rental and hardware upgrades and maintenance (as a contractor you must provide all your own gear, and I run my own cloud which automates much of my testing for me).

mcbert wrote: »

This assumes overall the taxes paid as a permanent vs as a contractor is roughly similar.

With a good accountant you pay far less taxes as a self incorporated contractor than as a permie. In my case, my "buying power" is about doubled from being a permie because I can deduct VAT as well as income taxes from many purchases.

However you are taking on a lot more risk. You must find all your own contracts almost always from the US sometimes the UK - onsite Irish contractors usually can get agencies to place them, whereas for remote work you are generally on your own to build leads and network. I typically see six months between contracts rather than two or three months during which I relentlessly upskill myself in what I think will be big next. There is never ever time between contracts, just earning time and non earning time, and non earning time is constant study and practice of new technologies to get that next contract.

You need to keep your family running costs very low, because there will be times of severe belt tightening. In this business it's very much feast or famine, either the money is pouring in or you are borrowing money from people to pay the rent and you are behind on just about every bill and you can't sleep at night because you and your family are so close to homeless. And feasts are almost exclusively dependant on the US economy, so right now things are good because the US economy is doing well, but a few years ago things were awful, and in a few years from now they'll be back to awful again. Such is the economic cycle, and you have no insulation from it.

Still, I wouldn't prefer any other kind of job. This very much suits me.

A simple rule of thumb is 1.5 times gross permanent

That's pretty accurate for onsite contractors. Maybe 1.6 times, especially given the overheads are quite a bit higher e.g. the onsite you get is usually far from your home which means a long commute or even a B&B some weeknights, but there is no point moving home because it'll be potentially a new onsite in six months.

For remote work contractors you'd want about 2.2 times given the long periods of non earning time, even though living costs in rural Ireland are a fraction of Dublin's.

Thanks. I've been wondering about this. I do have a family to consider, so wouldn't it be reasonable to take holidays like permanent employees? i.e. just book it in advance with your manager. I know I wouldn't get paid for such holidays, but the process to take them would be the same. That sound normal? Other threads here suggested this at least.

This entirely depends on the contract and/or line manager. Some if not many contracts want you to be there every day possible for six or twelve months as it is expected contractors take their vacation time between contracts. Most managers will give you the odd day off here and there for weddings and long weekends, but some can be real assholes about any time off at all, even if you are vomiting everywhere.

The really good news about vacationing between contracts is usually it's middle of off season. You can get a really great villa somewhere warm with virtually no one around for sweet deals - assuming your wife and children are allowed to come with too.

The reasons to go contracting, IMHO, are not financial. They are the freedom to do what you want, flexibility about where and when you work, disconnection from office politics, independence, etc.

+100

For me the biggest thing is freedom to pursue a career. In permie roles the org doesn't really want you to upskill past whatever boring mundane stuff that is your day job, and they'll passively and sometimes actively work to stop you. As a self incorporated company, I can follow leads I want, upskill in what I want and I reap the success of my endeavours directly in the form of an ever rising hourly rate. In a permie role, you are basically at the mercy of a slot becoming free in a hierarchy AND the company doing well. It's all so far out of your control ... I just always felt suffocated and bored.

I'll also tell you one thing: I have zero objections sitting in pointless four hour meetings when I'm earning hourly. I kick back and look out my window at the fields and think of how much money I just earned. BIG difference from being stuck in some windowless meeting room for an entire day as a permie where everyone is trying to throw banana skins at others and make others clean up their incompetent messes.

Thanks. Yep, I'm conscious of all this, but I do have a particular plan, and becoming a contractor, if I do it at all, is not intended to be a long term thing.

I would urge you never to think of contracting as a temporary thing. It's a profession and lifestyle. It's an equivalent commitment as retraining out of Java into Rust for your next five years of career.

I'd also not jump in completely without a taste. Try a six month contract using an umbrella company to manage your affairs. You'll earn about the same as a permie given there will be no pension contribution, but it'll give you a taste before you commit properly.

If you do decide to commit, take an OU course in Accounting so you can do your own accounts and taxes - saves on paying the Accountant for what is routine work. Learn the Irish tax code. Ruthlessly minimise costs and keep them low. If you work hard and keep upskilling and with a bit of luck with the economic cycle it is still possible to retire on a healthy pension by 50.

Niall

Graham

It's probably worth pointing out that remote working contractors are the exception, the vast majority are still based onsite where much of the costs/downsides/gaps detailed by ned14 don't apply.

If you're not sure if contracting is for you long-term, an umbrella company is the way to go.

colm_c

Some of you guys paint an awful picture of life as a permie!

Totally depends on the company IMO as to how you get treated.

Graham

mcbert wrote: »

I do have a family to consider, so wouldn't it be reasonable to take holidays like permanent employees? i.e. just book it in advance with your manager. I know I wouldn't get paid for such holidays, but the process to take them would be the same. That sound normal? Other threads here suggested this at least.

It would be perfectly reasonable (and normal) to book holidays in advance just like a permanent employee would.

You MAY find you're less likely to do it when you mentally add the cost of the holiday with the reduced earnings. It's something most contractors experience when starting out, after a while most realise that holidays are necessary whatever the perceived costs.

colm_c wrote: »

Some of you guys paint an awful picture of life as a permie!

Totally depends on the company IMO as to how you get treated.

Are your reading a different thread colm_c, I don't see much mention of permie life at all never mind a negative opinion of it.

I do agree with the 'depends on the company' theory, as in most aspects of life there's good and bad, pros and cons.

14ned

colm_c wrote: »

Some of you guys paint an awful picture of life as a permie!

I should stress my opinion is purely mine alone. I work everyday alongside permies who appear to be very happy in their roles and wouldn't be anything but permanent. The strength of my opinion is unusual for sure, and please don't read it as any form of gospel. To each their own!

Niall

14ned

Graham wrote: »

You MAY find you're less likely to do it when you mentally add the cost of the holiday with the reduced earnings. It's something most contractors experience when starting out, after a while most realise that holidays are necessary whatever the perceived costs.

A useful tip is to always book holidays for straight after a contract ends well in advance, so even if the client renews your contract you'll still get your holidays and if the client is renewing they usually very much want you back, so there will be no problem. That said in remote working contracting it is very usual for a client to extend your contract with half time hours so you can do handover to replacement contractors, this usually lasts three months or more and is an excellent opportunity to ease out of the current contract and into a new one with minimum cash flow disruption, so in this situation be careful with when you take holidays (another advantage of onsite contracting!)

As Graham very wisely says, you need holidays and down time, don't shirk on them else you'll burn out or damage your health. Even a cheap trip to Galway for a week can do wonders.

Niall