Calculating Equivalent Corp-2-Corp / 1099 / W2 Rate
"I make $x per hour. How much should I charge for freelancing on a 1099 or corp-to-corp basis?"
This is a common question that I see repeated over and over on various message boards. Answers will often range from a pithy 2 or 3 times your current rate, to "figure it out yourself." Additionally, you will get rambling replies about penalties, taxes, health care costs, and much more.
Assuming that you are currently in (or considering) a consulting/hourly relationship with NO BENIFITS, lets run some rudimentary calculations so you know the MINIMUM hourly rate that is equivalent in corp-to-corp terms.
Note: this assumes no vacation, EIC, no medical insurance, no retirement (and we don't factor in general liability insurance, per diem, or the credit risk of getting paid); we just calculate what rate will be necessary to cover the bare metal additional employer taxes.
So lets get out a pencil and start scratching numbers, so we can figure out how much it costs to hire an employee at $x per hour.
Federal Unemployment Tax (FUTA)
Even though you are no longer qualified to take unemployment as a small business owner, you will be required to pay Federal and state Unemployment Taxes. Generally, the FUTA tax ends up being 0.8% of the first $7,000 per year of each employee’s wages or salary. That means the employer’s maximum cost for FUTA per year per employee is $56 ($7,000 x 0.008).
State Unemployment Tax (SUI)
Next lookup your state's unemployment tax rate. Since you are starting out, you will need to find the "new employer rate." In Minnesota it is 2.13%.
Social Security
As of 2007, the employer must withhold 6.2% of an employee's wages and pay a matching amount in social security taxes until the employee reaches the wage base for the year. The total is 12.4% for the employee and the employer. The wage base for social security tax in 2007 is $97,500 (only the first $97,500 is taxed at 12.4%).
Medicare
As of 2007, the employer must withhold 1.45% of an employee's wages and pay a matching amount for Medicare tax. The total is 2.9% for the employee and the employer. Unlike the Social security tax, there is no maximum wage base for the Medicare portion of the FICA tax. Both the employer and the employee continue to incur and pay Medicare tax on each additional amount of gross compensation, with no limit on the amount of gross compensation on which the tax is imposed.
State/Local Income Taxes
Next, you will need to know what the income tax rate is. In Minnesota, there are three state income tax brackets (Married filing jointly):
| More than | But not more than | |
| 5.35% | $0 | $31,860 |
| 7.05% | $31,860 | $126,580 |
| 7.85% | $126,580 |
Putting it All Together
Now, for convenience we just add the numbers together and ignore the base limits:
| FUTA | 0.8% |
| SUI | 2.13% |
| Social Security | 6.2% |
| Medicare | 1.45% |
| State Income Tax | 7.05% |
| Total: | 11.64% |
Next, take your rate and multiply it by 11.64%:
absolute minimum break even = x + (x * .1164)
This rate is the absolute minimum equivalent rate (your costs will likely be hirer than this because you will most likely be required to have general liability and workers comp insurance). The real cost will be more than this.
This is just a quick calculation that can serve as a "line in the sand."
Labels: Business, Consulting, Startup
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