How to calculate my real earnings from hourly temp-to-hire moving to salaried employee?

Question

I live in California, U.S.A. I have been working in a company as a temp-to-hire position for a few months.

However, the company needs me to set up my own company, so that I provide service for them. Yes – they call it temp-to-hire, but still want me to set up a company. During this period I am not an employee at all. I do not get any benefits during this period. For example, I don't get 50% extra pay for hours over 40 hours per week, health insurance, or anything else. I get only a fixed amount of hourly pay.

Then, to my knowledge, they want to change from a service provider/temp-to-hire to their employee. It is my first job and I don't know much about what I will get if I am an employee. I know that the money I get will be lower than my current hourly paid amount, but I will get benefits.

My question is: If I currently I earn $1000 per week for 40 hours of work as a service provider on a pre-tax basis, how much should they pay me total including things like 401k, health insurance, and other benefits? How can I calculate something like that?

Answer 1

Get some professional accounting help. You're going to have to pay for everything out of the fee you charge: taxes, retirement, health care, etc. You'll be required to pay quarterly.

I don't think you should base your fee on what "this" company will pay as a full-time employee, but what you can expect in your area. They're saving a lot of money not going through an established employment firm and essentially, making you create your own. There are costs to setting up and maintaining a company. They have less risk hiring you because there are no unemployment consequences for letting you go.

Once you're hired, they'll probably put you on salary, so you can forget about making more money if you work over 40 hrs.

IMHO - there have to be better jobs in your area than this one.

Answer 2

This arrangement is a scam to get around certain tax and benefits laws, both State and Federal. I know they can't get away with this with a person-as-contractor, but this "he's not a contractor, he's a business owner" may move it into a gray area. (I used to know this stuff cold, but I've been retired for a while.)

The fact that they asked you to do this is at all is, IMNSHO, a Red Flag®. They think that this way they won't be paying 1/2 your FICA, your Workman's Comp, health insurance, overtime, sick leave or vacation time ... you will.

A somewhat simplistic rule of thumb for setting contracting rates is to take your targeted annual salary as a full-time, full-benefits employee and double it. So $50,000 becomes $100,000 a year; $25/hour becomes $50/hour.

You can tell them that driving to their workplace from your company's location is now a "site visit" and charge them your hourly rate for the one-way commute time. You could also tell them that your company charges 150% for hours worked over 40 hours/week, plus 150% on Saturdays and 200% on Sundays. Your company may also have a minimum 30 days notice of termination with a penalty kicker. Get it all in writing and signed by someone who has the authority to sign it.

Also, Get A Lawyer. The most expensive contracts I've ever signed were ones I thought I was smart enough to draw up myself.

Answer 3

Here's an alternative.

There are hundreds, maybe thousands, of contract engineering firms ("job shops") in the United States, probably hundreds in California alone. They are in the business of doing what your "employer" wants you to do, they know how to do it, they have been doing it for decades, working with the biggest, most-established companies in the country. They have forgotten more about providing engineering services to clients, and paying the engineers, than you can learn in a lifetime.

Call a few of them. Set up meetings. Budget a few hours for it. You want to talk with the most experienced recruiter in the office, the Old Guy Who Has Been There And Done That. Explain your situation, and tell them that, rather than go through all of the headaches yourself, you want to investigate the possibility of THEM handling all the headaches, for their usual markup of course. (You can probably word this better than I can, but you get the idea.)

The shop may or may not be willing to talk about their markup. My personal opinion is that this is perfectly OK. What they make off of you, after your rate is paid, is THEIR business.

Also, talk about what you do, and your recommended rate. It would not surprise me to learn that you are currently grossly underpaid.

AND, mention that, if the client declines, you're going to be available immediately, and you'd certainly be open to working with them. (You will see this again.) In fact, if they have any current leads that you fit, you would certainly be interested in hearing about them. (They may already have a req from another client, for which you fit, for which the client is willing to pay much more than your current "employer".)

If it were me, personally, I'd start with Yoh, Belcan, and maybe TAD Technical. These are three of the oldest and best.

I'd also hit up CE Weekly, get a subscription, and find some other shops with offices in your area.

Once you have a shop lined up, then ask your "employer" if, rather than you setting up a personal corporation, they'd be willing to work with an established Contract Engineering firm, who does this kind of thing for a living, who does this every day, who has been doing this for decades. Doing this is simpler for everyone, and, by going through an established firm, they avoid having to teach you how to do business with them. They also avoid the risk of having you reclassified by IRS as an employee, which exposes them to all kinds of legal and financial liability.

If they say "No", WALK AWAY FROM THEM. Immediately. They've just thrown up a HUGE red flag. This is where the other discussions with the shop come into play.

Answer 4

If you are a temp-to-hire, or you are asked to setup a company then you are not an employee. They expect you to fund everything from your hourly rate. This includes pay, insurance, taxes, social security, sick, vacation, holidays...

The rule of thumb for an established company is 1.75 to 2.25 times the salary rate is the rate they need to charge a customer.

For example:

employee get paid checks for $25/hour x 80 hours x 26 times a year.: 2080 hours or $52,000 per year.

Company can only bill customers for 1800 to 1900 hours of labor. They need to bill at 2 times the salary rate or $50 per hour. They will collect $90,000 (1800*50).

The numbers have to be run by the particular company based on their actual costs for benefits, overhead and profits.

If they were giving you $25 an hour as a contractor. They expect you to be making $12.50 an hour as an employee.

Answer 5

I would not assume they would pay for any benefits. You will be responsible for paying entirely for health insurance and social security and Medicare. This move is most likely not in your best interests.

At a minimum, I would charge double your current hourly rate and would charge for all hours worked including time and half for overtime. 3 times is actually probably a better choice if you want to cover holidays (which they will not pay you for), vacation time, etc. I know when I did project bids, we always priced at 2-3 times the salary we paid the employees.