Re: Your real worth - do the math

[Elna Tymes <etymes -at- LTS -dot- COM>]

Dick -

OK, since you are playing with numbers, here are some ballpark numbers
so everyone can see what's going.

Let's assume that you are, as a contractor who is either a dba or a
company that's recognized as a corporation.  While the tax rates will
vary from state to state, at least this will give us some place to
start.  Let's also assume you want to target about $100,000/yr. gross.
Start with 52 weeks a year. Subtract two weeks of paid holidays (10 days
of holidays), plus two weeks of paid vacation, plus another five
weekdays of sick time.  You now have 47 weeks.  If you're a contractor,
you'll have to spend some time marketing yourself; assume you can bill
approximately 75% of those 47 weeks - which is 36 weeks. In order to
make your $100K, you'll need to bill 40 hrs/week average for 36 week, or
1440 hours, at a rate of about $70/hr.  That's certainly not uncommon
here in Silicon Valley.

Now let's look at the expenses side of thing.  Remember you're acting as
a business, which has its own expenses and pays its taxes.

For ballpark purposes, let's say your company pays you a base salary of
$36,000/year, out of which you'll have to pay approximately 30% in
taxes, for a net spendable income of $25,200.  Don't get excited, you'll
actually get to spend more but it will come out of another pocket.

Let's also assume you're working out of a room in your house.  You
bought your house for $250,000 (yeah, I know, barely reasonable in
Silicon Valley, but we're also assuming nobody else in the house is
bringing in an income, which is also barely reasonable in Silicon
Valley), and have a mortgage of $200,000 (~$1400/mo), taxes of
$5000/year, and insurance of $600/year.  House costs total $18,800, all
of which comes out of your spendable income, but you're going to be able
to deduct around $14,000 of that in interest from your income taxes.

Now for the business expenses.  You the employer will have to pay FICA
for you the employee, of approximately $2500.  Assume the following
other annual expenses:  $3600 for health insurance, rent (at $300/mo)
$3600, utilities (at $100/mo - homeowner pays the other $100) $1200,
phone including Net connection ($150/mo - homeowner pays the other $25)
$800, garbage/water/sewer $600 (split 50/50 with homeowner), equipment
($300/mo) $3600, paper and office supplies $1200, business insurance
1200, and copying/postage $1200.  These add up to $56,500. Just for good
measure, take out another $10,000 in business expenses you haven't
accounted for here, for a total of $66,500 in expenses.

Put on your homeowner hat again.  From your $25,200 spendable income
subtract $18,800 in house payments, taxes and insurance; $1200 for
utilities, $300 for phone, and $600 for garbage/water/sewer. But add
back in the $3600 you've collected from you the company for rent. You
have $7900 in spendable income.

Now put your company hat back on.  1440 hours times $70/hr. is
$100,800.  Subtract the $66,500 in expenses - which included your base
salary, remember! - and you have $34,300 left. If you leave that as
profit, you'll be paying corporate taxes on it.  However I don't know
anyone who can't find some other legitimate expenses, such as donations
to a 401(k), or educational trips and conventions, marketing expenses,
or other things that can be justified, to reduce the amount you show as
profit.

Put your personal hat back on.  From your base salary of $36,000 you've
paid your taxes and your house payments, plus the utilities and other
basic costs associated with running a house, plus your medical
insurance.  You have $7900 plus whatever of the $34,300 you can justify
to play with.  AND you're going to get a probably significant portion of
the interest deduction back from your payroll taxes.

Yes, it's somewhat complicated.  But it's basic math, that's all.

Add to that the fact that most contractors wind up working more than 40
hrs/week, either because the job requires extraordinary effort, or
because they're carrying more than one project at a time, and you can
see how reasonable >$100,000/year can be.

You want to quibble with the rate because the going rate for contractors
is less in other parts of the country? Sure, but lower the cost of
housing too.  You still wind up with some mighty satisfactory spending
money.

Elna Tymes
Los Trancos Systems