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 service to a client. In addition to the labor used in performing that serivce, 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 and they tend to underestimate their expenses. As a result, when they start out, they tend to set their rates too low.
But if you make your living providing services to the public, your financial survival depends on your ability to understand the difference between rates and wages – and setting your rates high enough to pay the bills and make 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 an appoined 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 your 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. Now that you understand the difference between rates and wages, you should find it easier to charge an adequate rate to cover your expenses and make a living.
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- Self-Employment: Managing your Money Part 2 - March 7, 2006
- Self-Employment: Managing your Money Part 1 - February 2, 2006
- Self-Employment and the Difference between Rates and Wages - January 4, 2006