How to Fairly Set an Independent Contractor’s Rate

In today’s job market, more companies are turning to the services of contractors than ever. The move to utilizing contractors in the professional workplace proves to be cost-effective while keeping productivity maximized without slow-down.

Often the question becomes how do you compensate a contractor? The usual school of thought is to derive an hourly rate based on market salary and divide by the number of working hours in one year, which is 2,080 (40 hours multiplied by 52 weeks). However, is that fair to the contractor? A contractor gives up employee-paid benefits such as healthcare, vacation, and paid holidays. Should independent contractors then be penalized since those benefits are included in the 2,080-hour constant? That is the issue we will discuss in this posting.

Recently, I was asked by one of my hiring stakeholders to come up with an effective hourly rate calculation for an IT contractor that we were going to bring on board. Taking consideration of the benefits full-time employees received, I decided to back out those hours* from the 2,080-hour constant. This leaves me with the following:

Number of Working Hours in One Year…………………………………………………………..……..2,080

Less:

Number of Vacation Hours given to New Employees (8 hrs x 10 days)…………………….(80)

Number of Paid Holidays given to New Employees (8 hrs x 10 days)……………………….(80)

Number of PTO days given to New Employees (8 hrs x 5 days)…………………………..…..(40)

Number of Floating Holidays given to New Employees (8 hrs x 3 days)…………………..(24)

Total Number of Hours Available for Independent Contractor to work…………..……..1,856

*- Please note the number of hours used were based off of new, full-time hire benefits.

Market value dictates that the IT contractor would receive a salary of $110,000 per year if in a full-time role. To determine the hourly rate, we will divide the salary by the number of available working hours, which we’ve determined to be 1,856. This leaves us with an hourly rate of $59.27/hour, and most companies would round off to $59 or $60 per hour, depending on how generous they would like to be.

So, independent contractors, the next time you negotiate your hourly rate, here is some information to take into consideration.