Here’s a worksheet that FTEs and Consultants could use to convert their incomes from one to the other. There are a lot of variables, but I’ll try to account for all that I know of. This is written for the USA, but I’m sure you can easily translate it for other countries.
ConsultantRatePerHour – What the consultant get paid per hour
HoursPerWeek – The standard number of hours worked per week
VacationDays – Total number of vacation days in a year. Consultants should make sure they take at least 2 weeks (that is 10 work days) per year.
Holidays – Total number of Holidays per year. The typical amount in the USA is about 10 days.
EducationDays – Total number of days attending conferences and/or classes.
MarketingDays - Total number of days not working due to various marketing events. A conference can be considered a marketing day or an education day, but only count it once. This number can vary widely, depending on the person and the amount of work in a given location. The less work, the more marketing you will need to do.
NumberOfWorkWeeks – The number of weeks actually worked. There are typically about 10 holidays per year (2 work weeks), and then you add you vacation weeks (consultants should make sure they take at least 2 vacation weeks/year).
NumberOfWorkWeeks = 52 – ((VacationDays + Hoildays + EducationDays + MarketingDays) / 7 )
AnnualIncome – the amount of money you get for a give year. This is before any deductions.
For a consultant:
AnnualIncome = ConsultantRatePerHour * HoursPerWeek * NumberOfWorkWeeks
For a FTE:
AnnualIncome = AnnualSalary + Bonuses
Now for the hard stuff, the conversion formulas, but first a few definitions:
InsuranceCosts – this should include Health, Life, Work’s Comp, Disability, Errors & Omissions. For FTEs make sure you include every type of insurance in your benefit package. This is an Annual number.
RetirementPlanning – This is a tough one. This should be only Employer side stuff. That is pension and retiree medical (that is if they offer it). 401K doesn’t count, because it is part of your AnnualIncome, but employer match does count, since it wasn’t in the AnnualIncome number. This is an Annual number.
To convert a FTE to a W2 Consulting Rate (right side stuff is FTE numbers):
ConsultantRatePerHour = (AnnualIncome + RetirementPlanning + InsuranceCosts) / (HoursPerWeek * NumberOfWorkWeeks)
To convert a W2 consulting rate to a FTE AnnualIncome (right side stuff is in Consultant numbers):
AnnualIncome = (HoursPerWeek * NumberOfWorkWeeks * ConsultantRatePerHour) – ( InsuranceCosts + RetirementPlanning)
The harder conversion is when trying to compare 1099 consultants (that is consultants that have their own business and pay their own taxes). They have 2 extra costs and 1 extra income:
EmployerTaxes – In the States you (being the employee and employer) will have pay the employer side payroll taxes, plus taxes on your business. At minimum, you will have the employer FICA and Medicaid numbers (about 8% salary). Then add Fed Income tax for you company (if it makes any money) and State and local taxes.
CostOfDoingBusiness – This is stuff like accountant fees, and marketing costs. Marketing costs can include stuff like conferences, or even better put the conference cost towards education.
EducationCosts – As an independent you are responsible for your own education. This is good and bad, as you need to budget for it, but you only need permission from yourself (and/or your spouse) to attend. Remember, your future earnings will eventually be affected by your choices. This amount should include the cost of the training, plus all travel expenses. The plus side, you should be able to write most of this off your taxes (but contact an accountant first).
TaxDeductionSavings – If you have your own company, you can right off items that an FTE would not normally be able to deduct from their taxes. This number is the amount on money you actually save by using these deductions. Depending on your accountant this could be a little, or a lot.
To convert a FTE to a 1099 Consulting Rate (right side stuff is FTE numbers):
ConsultantRatePerHour = (AnnualIncome + RetirementPlanning + InsuranceCosts + EmployerTaxes + CostOfDoingBusiness + EducationCosts - TaxDeductionSavings) / (HoursPerWeek * NumberOfWorkWeeks)
To convert a 1099 consulting rate to a FTE AnnualIncome (right side stuff is in Consultant numbers):
AnnualIncome = (HoursPerWeek * NumberOfWorkWeeks * ConsultantRatePerHour) – ( InsuranceCosts + RetirementPlanning + EmployerTaxes + CostOfDoingBusiness + EducationCosts - TaxDeductionSavings )