How to Calculate Contractor’s Annual Salary

For a lot of software engineers your first job offer will be a contract position, or contract to hire. The most important part of accepting any job offer is being able to accurately calculate your annual salary.

Some might think that calculating annual salary goes something like this:

Hourly Rate X 40 Hours (per week) X 52 Weeks (per year) = Annual Salary

Unfortunately, that’s no where near accurate. At least, here in the United States, there are five major areas that you have to account for when calculating your annual salary.

Health and Medical Insurance

Health Insurance — here in the United States, this is the worker’s own expense. And while some consulting agencies are large enough that they offer discounted or group plans, the prices are still out of pocket.

Dental Insurance — a single visit to the dentist, just for x-rays and a cleaning can run upwards of $200. A root canal can cost upwards of $2,000. All of this is made more affordable with dental insurance. Even with its annual benefit cap of around $1,500.

Eye Insurance — if you wear glasses or contacts, its recommended that you schedule an eye exam annually. This can run around $300 with no insurance.

Contact Lenses and Glasses allotment — many insurance plans include $200 a year for contacts and $200 a year for glasses. This significant cost reduction won’t be available to you as a contractor.

Other Misc. Insurance

Disability — this covers you in case you were to become disabled and unable to perform your job function.

Life — this takes care of your family in the event that you were to die.

Pet Insurance — as the lock-down has shown many of us, our pets are more like family than anything. What would you do if they had a major veterinary emergency?

Holidays

Most companies shut down their offices for a minimum of six days: New Years Day, Memorial Day, Fourth of July, Labor Day, Thanksgiving, Christmas.

Other companies, especially those trying to attract top tech talent, have closer to 13 paid holidays, including days like MLK day, Juneteenth, the day after Thanksgiving, and Christmas Eve.

Let’s go ahead and split it down the middle at 10 paid holidays. Days that you won’t be able to go into an office and work because the office will be closed. Even if you’re fully remote, it’s likely that there won’t be anyone else online with whom to work.

Take those 80 hours off your annual total.

Sick Days

This one is highly subjective. Many of us are very healthy individuals. But if the global pandemic has taught us anything, it’s to plan for the unexpected. Between trips to the dentist, annual physicals, and the occasional cold/flu, I personally budget a week’s worth of sick days each year.

Take another 40 hours off your annual total.

Paid Time Off

Workers in the United States are terribly overworked. But even the lowest expectation of a white collar position includes two weeks paid time off. That’s another 80 hours.

On the other hand, this is one of the perks of contract work. You could potentially take even more time off than usual. The downside? You’re still not getting paid. Let’s use the minimum.

Take another 80 hours off your annual total.

Annual Calculations

If you begin with 40 hours per week for 52 weeks per year, you start with 2,080 hours.

Remove 80 hours for holidays. 40 hours for sick days. 80 hours for vacation. And before you even get to insurance, you’re at 1,880 hours. Or, 10% off that initial number.

Let’s put some real numbers to this. Let’s say you find a respectable full-stack contract position offering $50/hour. Your original (incorrect) formula would have you making $104,000 per year.

With our new formula, accounting for holidays, sick time, and vacations, you’re down to $94,000 per year.

Now, let’s do some back of the napkin calculations:
- Health Insurance — $300/mo (single individual)
- Dental Insurance — $30/mo (single individual)
- Vision Insurance — $30/mo (single individual)
- Eye-care allotment — $400/year
- Disability Insurance — $100/mo
- Life Insurance — $30/mo
- Pet Insurance — $20/mo

All of that boils down to an extra $6,520, without any incidentals for actually using the insurance for a cavity, or broken arm, or new glasses. And that’s for a single individual. These costs skyrocket when you factor in a family, both for health insurance, and for the increase life insurance coverage.

That brings our total annualized salary for a contract worker, quoted at $50/hour, down to $87,480.

Conclusion

If you’re taking your first job in the software engineering world, this may still be a great deal for you! Especially if you lack prior work experience, or if the company has a strong contract-to-hire pipeline with a reputation for bringing employees on.

But if you’re looking at shifting from a salaried position to a contract role, be extra careful you don’t miss these hidden expenses!

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