18 Feb 2008 04:53:04 | Ellen Zucker
The difference between rates and wages is not always clear to
newly self-employed people and their wage-earning clients.
Both look similar on the surface; both are expressed in dollars
and cents per hour. But they each represent something very
different.
Wages are the payment a worker receives for his labor.
Rates are the payment a business receives for performing a
serivce to a client. In addition to the labor used in performing
that service, rates must cover the business's overhead.
Because of that, rates have to be higher than hourly wages
earned by employees for comparable work.
Most newly self-employed workers are former employees. They are
accustomed to receiving pay based on wages. Because they don't
understand the difference between rates and wages, when they
start out, they tend to set their rates too low.
To survive, your rates must be high enough to pay the bills and
enable you to earn a living.
Some of the differences between a self-employed person's rates
and an employee's wages are explained below.
WAGES
• If you are a wage earner, you are due an hourly wage just by
being present and willing to work at a set time, for the period
of time demanded by your employer.
Your wage is the payment for your labor.
• The employer supplies the necessary equipment and supplies for
you to do the work. And, the employer supplies your workplace.
• You enjoy all of the legal and social protections due to
employees such as Unemployment Insurance, and employer paid
Worker's Compensation Insurance.
• Most full-time employees enjoy fringe benefits. These range
from paid vacation and sick days, subsidized health insurance,
retirement benefits, etc. to stock options and more to higher
ranking employees at larger companies.
RATES
• As a self-employed service provider, you receive income based
on your billable hours, that is, time spent on performing
services for your clients.
• You furnishes your own supplies. Unless the service is one
that is performed off- site, you supply your own workspace.
• You have to equip yourself to be in business and provide your
services: You must procure and equip your workplace, invest in
skill and product development, market your services, purchase
business insurance, and handle billing, recordkeeping and
collections.
• As a business owner you take on a great deal of risk. It is
reasonable, and expected, that your rates should allow for a
reasonable profit over and above your expenses and salary.
The above is true for any business. Below are additional costs
you pay because you are self-employed.
• Unlike most of your employed counterparts, there is no
employer subsidy for your health insurance. And, as an
individual, your costs will be higher than they would be as part
of a larger organization.
• Aside from Social Security, you are totally responsible for
your own retirement nest egg.
• You will pay both the employee's and the employer's share of
the FICA tax burden (15.3%); double the burden that falls upon
your employee counterparts. The IRS allows limited deductions
for this tax, but your net share is still far higher than for
your employed counterparts.
But you can only bill for services rendered.
The upshot is that as a self-employed service provider you must
cover many expenses that employees do not. Therefore you should
have no qualms about charging an adequate rate to cover your
expenses and make a living.
About Author :
Ellen Zucker has been self-employed for over ten years.
