Compare Compensation
This little tool just gives you an idea of how your contract basis (1099, contract-W2, or fulltime) affects your net income. It assumes that you'll need insurance and will make retirement contributions of some kind, because these are the two most important, and usually the most expensive, benefits offered to fulltime employees. Take a look at the F.A.Q. for more on the default values used by this tool.
Your Fulltime Net is just the rate you entered multiplied by the number of hours you'll work in a year. The Contract W2 Net is your fulltime net minus the cost of benefits, since you'll have to cover these yourself. The 1099 Net is your contract-W2 net minus the cost of covering the employer's portion of the US FICA contribution—keeping in mind that it's not just a simple subtraction. When you work 1099, you get to deduct the cost of expenses before FICA taxes are calculated.
Rate Calculator
Starting with the net compensation you want to earn, this calculator determines the hourly rate you should bill (the Actual Rate), along with a Target Compensation value and your Effective Compensation. These are defined as follows:
Actual Rate — This is the hourly rate you must actually bill to reach your target compensation. It is the Target Compensation divided by the number of hours you'll work in a year.
Target Compensation — This is the amount of money you must make in order to clear your Net Compensation (what you entered) while also covering your employment taxes and expenses.
Effective Compensation — This is your Target Compensation adjusted to reflect any employment taxes and benefits covered by your employer. The checkboxes can be used to indicate exactly which items your employer covers (if any).
Notice that, as you change the calculator from 1099 to contract-W2 to fulltime—or check additional expenses— your contract rate goes down. In each case, the employer (not you, persumably) is covering more and more of your expenses/benefits. Meaning that your rate can be adjusted down while still maintaining the same net compensation.
Salary Calculator
Using a rate you intend to charge, this calculator determines your Net, Gross, and Effective compensation. These are defined as follows:
Net Compensation — Your 'take-home pay'. In other words, the money you want to have left over after you cover your expenses and employment taxes.
Gross Compensation — This is simply the number of hours you'll work in a year multiplied by your contract rate.
Effective Compensation — This is your Gross Compensation adjusted to reflect any employment taxes and benefits covered by your employer. The checkboxes can be used to indicate exactly which items your employer covers (if any).
Notice that, when you're working 1099/Corp-to-corp, your gross and effective compensation values will be same, reflecting the fact that you are covering all of your own expenses and taxes. But...if you configure the calculator for fulltime employment, it will be the net and gross values that are the same because in that case the employer covers all your expenses/benefits.
Compensation and Productivity
The compensation field is the amount of money you'd like to earn for the year after accounting for employment taxes and expenses.
Productivity is measured in weeks or hours per year. When you enter a value for productivity, include only those hours that you'll actually be able to bill. For example, if you plan to take the ten US federal holidays along with 4 weeks of vacation, then your productivity is approximately 46 weeks or 1840 hours per year. Though...that figure is probably a little high for a contractor. Remember that you will also spend some number of weeks just finding work and these should also be subtracted from your productivity.
Rate and Productivity
The rate field is precisely that, the amount you intend to bill clients per hour.
Productivity is measured in weeks or hours per year. When you enter a value for productivity, include only those hours that you'll actually be able to bill. For example, if you plan to take the ten US federal holidays along with 4 weeks of vacation, then your productivity is approximately 46 weeks or 1840 hours per year. Though...that figure is probably a little high for a contractor. Remember that you will also spend some number of weeks just finding work and these should also be subtracted from your productivity.
Taxes
As a contractor, you have to worry about the employment taxes that you wouldn't ordinarily pay as a fulltime employee—The employer's portion of Social-security and Medicare, for example. When you work 1099, this extra tax is calculated as a percentage of your 'taxable gross income', which is itself a percentage of your gross income after subtracting deductible expenses. When you're working contract-W2 or fulltime, your employer covers this tax for you.
Remember that the Rate and Salary calculators only take into account the additional taxes you must pay as a contractor. Normal federal income taxes and the employee's FICA contribution should be considered as well, but since you pay these no matter what type of work you're doing, Skillserv assumes that you're already aware of how these taxes will affect your income.
Non-deductible Expenses
Next to medical and dental insurance, retirement contributions are the most valuable benefit offered to fulltime employees. Unfortunately, when you're working on 1099 or corp-to-corp, you have to cover this expense yourself. Although contributions to a personal retirement plan, such as an IRA are deducted from your adjusted gross income when you calculate your federal income tax, they do not reduce your employment taxes and, consequently, are not counted as a 'deductible' expense.
Deductible Expenses
These include items like medical insurance, dental insurance, long-term disability, and other costs of doing business. As a contractor, you must cover these yourself out of your gross compensation, and they get subtracted from your gross income before employment taxes are calculated...at least when you're working 1099 or corp-to-corp.
However, when you choose a contract-W2 or fulltime configuration, all expenses are treated as non-deductible.