How To Realistically Set Your Fees - Part 3
Effect of Benefits
We have previously examined realistic billable hours and the
effect of business expenses on your hourly rate. Now we'll look
at the effect of benefits.
Once upon at time, when we were employed, we received a benefits
package from our employer. This usually included health, life
and disability insurance. Many firms also had available pension
programs, profit sharing, dental and vision coverage. In
addition, one-half of your social security was paid by your
employer.
As self-employed individuals, we have to provide these benefits
for ourselves. This means an additional boast to the hourly rate
we've calculated so far. For the sake of argument, let's figure
a standard benefits package consisting of health, life,
disability, pension and profit sharing. Let's figure health
insurance costs at $300 per month; life at $50 per month;
disability at $150 per month; pension (a SEP-IRA) at $500 per
month and about 10% for a profit margin.
If we total these up we get a yearly figure of $12,000. Now keep
in mind, that most of these will be paid for in after tax
dollars. So, we need to add approximately an additional 30% to
this number, for a true total of about $15,600 per year. The 30%
represents the amount of taxes you need to pay to end up with
the net amount of money needed to pay for your benefits package.
Keep in mind that I chose 30% as a completely arbitrary number.
Your own tax situation may be higher or lower.
How does this effect our hourly rate, let's see. Last article we
left off at $56 per hour. This represented a yearly salary of
$42,000 plus annual business expenses of $15,000. If we take the
$15,600 in benefit costs and divide by our billable hours of
1100 per year, we get approximately $14 per hour. This brings
our total hourly rate to $70 per hour.
Now, we need to factor in our profit sharing percentage. Once
again, I choose 10% as a representative number. Your targeted
profit could be higher or lower. If you take your $70 per hour
rate, multiply by 10%, you end up with $7 per hour. Your total
hourly rate comes to $77 per hour.
This is the amount you need to charge to cover all we discussed
so far.
Compare this to the approximately $20 per hour you would need to
get paid by an employer to earn our hypothetical $42,000 per
year. And yes, I know today many employers require a co-payment
on their benefits package. I stated it this way for simplicity
sake.
So, you need to charge almost 4 times what you would earn in
salary to end up at the same place. Don't be discouraged, there
are many people out there that are charging a lot more than this
and getting all the business they can handle. Remember, these
numbers are hypothetical, your situation may be much different.
Copyright 2000, DeFiore Enterprises.