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Too many entrepreneurs set their rates using either the PIDOOMA method (Pulled It Directly Out Of…Mid Air) or the Rainman method (about $100, definitely about $100). “What’s wrong with that?” some of you dimmer bulbs may be asking. Plenty. These methods might have worked when you were hungry for work and just starting out, but in the gig economy it is tougher and tougher to keep your head above water by charging customers whatever price whimsy happens to blow into your head.
Every stripper makes $2500 a week.
I haven’t talked debits and credits with women who ply the exotic trade, but I have talked finances with plenty of people who defend the trade. (Clearly, I’m not attacking a business whose primary service is providing lonely men with nearly naked women who will accept money to pretend to like the poor sap. That would be cruel.) But typically, they defend it by asking, “Do you know how much money those women make?” and then proceed to trot out a figure of $2000 to $2500 a week. My response to them is the same as when people involved in multi-level marketing folks lay their jive on me: Show me the W-2’s.
Related: W-2 or 1099? Why It Pays to Classify Your Employees Correctly
The reality is most novice gigsters and solopreneurs don’t make as much as they think they do, want to or even need to. Many entrepreneurs, even veteran ones, are failing to adjust to the gig economy in ways that put their livelihoods at risk. Let’s take a look at how you establish an appropriate bill rate in the gig economy.
Figuring base pay.
Base pay is easy to calculate. There are 2,080 hours in a standard employee work year. But average entry-level employees get 80 hours for two weeks’ vacation. Now we’re down to 2,000 hours from which we must also subtract 10 legal holidays and six sick/personal days, all paid. Therefore, for independent contractors to enjoy the same benefits, they must charge a bit more for the 1,888 hours they can work (bill for) in a standard year, without overtime. If our comparison is with a full-time employee making $50,000 per year, the gigster must charge $2.44 more per hour than the employee is paid per hour, just to be at parity with them. But wait, there’s more.
Adding in health insurance.
Many workers take the cost of health insurance for granted, but according Jon R. Gabel, Heidi Whitmore, Kelley Dhont, et al, in their paper published in The Commonwealth, “Individual Insurance: How Much Financial Protection Does it Provide?” employers pay 83 percent of health insurance, so our $2.44 an hour compensation gap becomes $3.34 an hour. That number is actually quite low, as individual plans tend to have significantly higher out-of-pocket costs: “In-network deductibles average $1,550 in individual policies compared with $138 in employer-sponsored plans, while out-of-network deductibles average $2,235 and $354, respectively.”
And if you think that extra money buys you better coverage you are sadly mistaken. According to the authors, the extra money will actually buy you worse coverage. “While nearly all group coverage includes some level of prescription, mental health, and well-baby and well-adult care benefits, significantly fewer individual policies include such coverage. What’s more, 56 percent of employer-sponsored plans limit out-of-pocket costs for covered persons to $2,000 or less. Only 11 percent of fee-for-service individual policies include such out-of-pocket maximums.”
Related: 6 Hacks for Taking Control of Your Healthcare Costs
So if we use a conservative figure of 30 percent less financial coverage for the gig entrepreneur, and then calculate the gap, our solopreneur requires $4.34 per hour above a full-time employee’s hourly wage rate, just to be at parity.
Paying the taxman.
While everyone pays taxes, the gig entrepreneur may find that they suffer a bigger bite than their full-time counterparts. According to the Internal Revenue Service, “For self-employment income earned in 2013 and 2014, the self-employment tax rate is 15.3 percent. The rate consists of two parts: 12.4 percent for Social Security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance). Many gig entrepreneurs will incorporate, and pay corporate taxes instead of self-employment tax, but they will ultimately pay more taxes (assuming the same deductions) as their full-time equivalents.
“As a self-employed individual, you are responsible for paying income taxes and self-employment taxes,” according to eFile. Essentially, you are paying both the employer’s and the employee’s portion of the payroll tax. Now, the financial gulf between you and your full-time employee Doppelganger is $4.99 an hour.
Related Book: The Tax and Legal Playbook: Game-Changing Solutions to Your Small-Business Questions by Mark J. Kohler
Factoring in liability insurance.
Are you a gambler? Are you ready to bet your business, house, car, collection of super hero figures and big jar of coins that you won’t screw something up and be found liable for a mistake you may have made? If you’re not feeling lucky, you will probably want to invest in liability insurance. But more importantly, in many cases larger clients won’t even allow you to bid a project unless you have liability insurance. Insuron tells us “the typical contractor’s (general liability) Insurance costs $380 to $1,380.” If we take the median liability insurance cost it adds another $.42 per hour in the extra costs paid by gig entrepreneurs, bringing the gap to $5.41 an hour.
Tallying overhead.
Overhead is a catch-all term that routinely includes costs I’ve already detailed, but it also includes others I haven’t mentioned yet. I won’t mislead anyone by counting them again.
Thankfully, when it comes to overhead, gig entrepreneurs tend to have a bit of an advantage. But then again, even though our burden rate (as the actual cost to a company of employing a worker is called) is lower, solopreneurs still have desks, computers, software, printers and other tools and equipment that depreciate. In many companies the total burden rate can be 50 percent of the actual cost of employing a worker, but that figure undoubtedly contains costs we’ve already considered. As I said, we don’t want to double count and lose credibility, here; so, if we assume an additional 10 percent in overhead/burden rate, our gap becomes a walloping $5.95 an hour. That means gig entrepreneurs have to make $62,378.08 just to achieve the equivalent compensation of a similarly employed full-time employee making $50,000.
Related: 3 Factors When Choosing Between a Contractor or Full-Time Employee
Arriving at the bottom line.
Despite the gap in compensation, gig entrepreneurs need to be mindful that this is just the difference in the wages they pay themselves as a worker to get to parity. It allows for no funding to them as business owners. The entrepreneur, whether gig or traditional, exists to make money and grow a business. This isn’t greed; this is productivity. They need more than just their wages to invest in their business, to market their services and to fund their sales efforts and unbillable time, like writing proposals and going on sales calls. As an entrepreneur who needs to fund such efforts, my goal has always been a net profit of 35 percent, after I’ve already paid myself and the expenses above. To achieve that, one has to make gross profits well above the compensation gap figure. So, therefore (trumpets, please): To arrive at a bill rate, we need to calculate the amount of time a project will take us to complete, apply our adjusted hourly rate (example calculated above) and then increase that number by anywhere from 35 to 50 percent, to create gross profits to market, grow and reinvest in the enterprise, going forward.
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