Converting Full Time Pay to Hourly Contract Rate

Multiple people asked me this week how much they should charge for an hourly development engagement, trying to figure out what’s fair. They all know their full time salary range but didn’t know how to translate that into self-employed hourly rate. This post is a quick explanation of the formulas I use. This is obviously not an industry standard or what your next employer (or employee) is going to use but you might find it a useful reference point. This is limited to US based employment. Needless to say, these formulas ignore the many employer tax differences of employing W-2 vs 1099 employees. They are also ignoring the most important factor which is the human element. We are talking about people hiring other people where unique skill sets, personalities, and economic realities can often mean more.

There are two types of hourly employees, those you can easily replace with full time people and those you can’t afford (or can’t convince) to work for you as W-2 employees. For the first group, the hourly rate is based on the employer cost of a full time person. Basically, the employer will want to keep its cost about the same regardless of the employee status.

Assuming:

  • 20% employer overhead cost over the employee cash compensation for benefits, taxes, and other expenses
  • 250 work days a year
  • 15 days paid vacation
  • 8 hours work day

The formula is:
Hourly rate = Total annual cash compensation / 1567

For the second group – people the employer can’t afford to pay full time or the kind of top talent they can’t convince to join full time – the formula is slightly different. There is an additional consideration. People doing short term contract work typically lose about 20% annually due to time in between jobs and the cost of finding work on a regular basis (a contractor factor of 0.80 – 20%productivity loss). Because they are top talent, the employer will have to pay for that loss. This gives us:

Hourly rate = Total annual cash compensation / 1253

The full formula is:

\displaystyle \frac{A * E}{(W - V) * H * C}

  • A – total annual cash compensation
  • E – employer overhead percent (1.0 is 100%)
  • W – work days a year
  • V – paid vacation days
  • H – hours a day
  • C – contractor factor (percent time employed)

This means:

  • An average developing making $120K a year would be able to get about $80/hour
  • A senior expert making $200K a year would be able to get about $160/hour

If the full time job come with equity (assuming a 25% annual vesting schedule of a publicly traded stock), you can add 25% of the equity value to the annual salary.