Here’s a rough calculation similar to the one I went through when determining my own minimum contractor day rates: [LIST=1]
Consider the annual take-home income you’re aiming to earn. This is a big topic on its own, but let’s just use $50,000 as an example number.
As a contractor, you may need to provide your own resources - liability insurance, software licences, computer hardware, phone and phone bills, office expenses, web/email hosting, per diem expenses, etc - so add up any expected monthly or annual costs. Let’s use $4000/year as a number.
We should register for GST as it’s probable that with these kinds of numbers we’ll pass the $75k GST turnover threshold. Allow 10% of your revenue to go to GST (I keep mine in a separate offset account so I don’t spend it). Some clients prefer to deal with contractors who are GST registered, so it has some advantages to make up for the painful extra paperwork.
Allow for superannuation contributions. In Australia this is a minimum of 9.5% as of July 1, 2014. If you’re smart and can afford it, you might contribute more.
Allow for income tax and additional levies (ie. Medicare 2%). Our taxable income puts us in a tax bracket taxing $3572 + 32.5c for every $1 over $37000.
Determine the number of days you’ll be available to work each year by subtracting non-working days (weekends, holidays/leave, public holidays, sick days, spending days with family, trips to the dentist, etc) from the number of days in a year, ie 52 weekends at 2 days each, 4 weeks annual leave, 10 public holidays, 5 sick days: 104 + 20 + 10 + 5 = about 140 days. Days in a year minus our desired days off: 365 - 140 = 225 working days. Say thank you to the trade union movement that we don’t need to dig coal 365 days every year without a break.
It doesn’t always work out that you’re contracted for every working day - some clients may only request you for a few days per week. Depending on your contract, you may have less job security too. There will inevitably be gap days where timing doesn’t work out, projects have delays or you’ve got some downtime between contracts. Multiple part-time contracts make things much more choppy than a single full-time contract. In a bad period, you might lose 20% of your billable time, but let’s just set 5% as an example contingency.
As a contractor you’ll also either incur loss or receive profit for your job. You may also need to accept responsibility for defective or remedial work. Decide how likely this might be, how bad it would be if it did happen, and whether you’ll work instead of sleeping to get it done on time, or simply push other work back. As a contractor you usually have the right to sub-contract your work (unless your work contract states otherwise), so ensure your rates allow you to comfortably afford that, also allowing for the time it’ll take you to project manage your sub-contractors.
If you’re a contractor that also runs a business, you’ll need to be aware of how productive you’re able to be, and how that matches with your own and your client’s expectations. If you’re running a business, doing sales, managing projects, bookkeeping, dealing with computer issues, answering the phone, etc it can all add up. When I was working solo and running a business, I found 6 hours in an 8 hour day was the maximum realistic expectation for time I could spend on client work.
[/LIST] Putting it all together (working backwards) - for ~$50,000 in take home pay, we’re looking at:
Income tax & levies: $12,163.19
Superannuation (untaxed): $7600
GST on revenue: $8000
Business overheads: $4000
[/LIST] Therefore, we’d need to generate revenue of around $80,000 ($50,000 + $31763 = $81763)
$80,000 in 225 working days is about $355 per day assuming we’re 100% productive every workday. However, a daily rate of around $475 (with contingencies allowing for gaps and unpaid days) is a bit more realistic.
[B]Other things to consider:[/B]
Your contract daily rate and any hourly rates you used to earn as an employee are not comparable. Don’t go there!
Temper your calculations with some comparison with your peers - others with a similar skill & aptitude level and number of years experience. Where do you fit in relation to them?
Your value to your target clients. Doing the same work for a local small business and a Fortune 500 company will be valued incredibly differently. There are good arguments to charge what you’re worth, not just what you ask for. Similarly, consider how you might best support not-for-profits or other worthy recipients of your efforts.
Your rates may have an effect on your mindset, and therefore your ability to deliver high quality work.
The lower the quality of work you do, the higher the number of people you’re competing with, which just gets messy and makes it harder to negotiate with clients. Work hard to get above the low first few levels as quickly as possible.
There are a few nifty tools that help do some of the above calculations for you:
http://www.yourrate.co/ (although it seems to double the rate for taxes and savings).
[*]For Aussies, this calculator looks at income tax, the Medicare levy and superannuation: http://www.paycalculator.com.au/