I have been asked a number of times recently by people moving from being an FTE to new Contracting gigs how I come up with a Contracting Rate.   I decided to write down my process.  This has been fine tuned over 20 year of contracting, and works pretty well. 

 

I figure there are 2080 working hours in a normal year (2088 in a Leap year but I just use 2080)

Now you have 1000 hours left in the year that you will actually "work".   

  

I normally worked as a W2 worker so that the contracting agency took care of paying my taxes, worker's comp, and other stuff that can impact you later (like unemployment insurance).   This is a VERY good thing!!  (you will see why later...)

  

Figure out how much you need to make in a year to pay your bills as your low end number.

  

I usually started with a Gross Income number because I knew what my previous income was and I could figure a percentage of what I needed to pay bills. So...

The good thing about doing it this way is that if you work more than 1000 hours in a calendar year, you are good to go.  You have figured out what you NEED to pay the bills, and anything else I think of as a Bonus.  In the Bay Area, I usually could get between 60-65/hour W2 as a Project Manager, and about the same for an Exchange Engineer.

  

Always quote a higher rate for a shorter contract and you can go lower on a longer contract.  If they offer you a 12 month contract, and you dont have to worry about these two time blocks, you can ask for a slightly lower rate:

In this case, I might ask for 65 and drop to a 59 rate as a "goodwill gesture" to the agency.  They can sometimes give you an idea of what the client is willing to pay, and I usually know up front if it is a rate I could work with. 

  

If you are going 1099, all this changes...  I then usually tack on 40% onto the W2 rate, so if it was a 60/W2, it would be $100 on a 1099 contract.  You are then responsible for paying all your taxes and you HAVE to make sure you are working with an accountant to make sure you are holding enough $ aside during the year.  I didnt like 1099 because with all that $ coming in, I paid off a lot of bills and had to come up with the tax money the following April.  I will never do that again without an accountant telling me what to make payments on during the year.   This is why I now go only W2 for contracts.

 

I hope this helps those of you looking for work in this rough job market - Contracting is a very viable alternative, and can help cover expenses while you look for that next "right fit".