One of the most common challenges people transitioning from permanent employment to independent contracting face is establishing a pricing structure. That is, how much you should charge per hour. At first, it can be difficult to determine a rate that both sides are comfortable with. Even though it might seem logical to use the same hourly rate as when you were a permanent employee, this isn’t recommended. Many factors need to be taken into consideration when determining an hourly rate as an independent contractor.

Why Your Employee Hourly Rate Doesn’t Work for Contracting

The first factor to take note of is taxes. A benefit of being an independent contractor is that you often save money on taxes. When you work for yourself, you can deduct any legitimate costs associated with running your business. This could include phone, internet, equipment, and even meals (classified as entertainment). On the other hand, because you can only bill for hours worked, you have to factor in unpaid vacation, sick, and statutory holidays, as well as time off between contracts. Additionally, as an independent contractor, you'll be paying for administrative expenses (e.g., registering a business, accounting, and legal services).

Calculating Your Independent Contractor Rate

A general guide to calculating your hourly rate as an independent contractor is to multiply your hourly wage as a permanent employee by 50 to 75 percent. Then, add it to your hourly. When you work with a range, you can be flexible depending on the length of the contract, industry, and location.

The Impact of Incorporating on Your Rate

As your company is not subject to paying the employer portion of federal taxes, you can typically charge a higher rate and pay less tax if you choose to incorporate rather than operate as a sole proprietor. However, you will also face higher upfront and ongoing costs if you incorporate your business.

Seek Professional Guidance to Set a Competitive Rate

If you are struggling to determine your rate, it can be helpful to seek guidance and advice from an agency or trained professional. A reputable agency will not only tell you the maximum rate that the client is willing to pay, but they will also tell you how your experience compares to others in the market. This will help you establish an hourly rate that keeps you competitive. To succeed in the independent contracting market, it's often beneficial to have some flexibility in your rate.

Is Independent Contracting Right for You?

The majority of candidates who move into independent employment thoroughly appreciate the advantages of consulting and never look back; however, contracting is not for everyone. To determine whether contracting is right for you, seek advice from trusted professionals and conduct your own research.