Don’t Sell Yourself Short in the Gig Economy

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From Entrepreneur, Phil LaDuke provides an informative and entertaining article with guidance on how to develop an appropriate bill rate for clients.  Phil starts with the base pay and adds key compotents to get to a bottom line.  Phil writes:

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.”

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.

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.

Read the full story at Don’t Sell Yourself Short in the Gig Economy

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