While on the look out for your next contract, different recruiters will reach out to you regarding opportunities that come with differing rates. During negotiations, several consultants (depending on their employment) will request a W-2 or C2C rate for the contract. What does that mean in general, and what does that mean to you? To the newly initiated, there might not be a significant difference between them. However, that couldn’t be further from the truth. Understanding the differences will empower you to make the best decisions for yourself.
W-2 (Meaning Wages and Taxes) is what most employees are to a company. Consultants are typically ‘W-2 Hourly,’ meaning that while you are W-2, you are also paid per hour and not paid when you don’t charge time to a client.
The W-2 concept in general means that your employer (or consulting firm) handles the overhead and benefits related to you as an employee. For instance, you’ll have certain benefits (e.g. health insurance, dental, vision, life insurance, disability, 401k, 529 Plan, etc.), along with corporate overhead such as tax burdens (payroll, corporate licensing, and other business expenses/taxes) and coverages (workmans comp, umbrella, errors of omission, and other insurances for consulting).
A majority of consulting positions are W-2 Hourly, and firms will take a portion of a consultants billable rate (i.e. the rate the client is paying per hour for a consultants expertise) to account for these costs, running their company (salaried employees, marketing, legal etc), in addition to a profit margin.
Another iteration of a W2 employment that we see many firms moving towards is salaried employees. This will provide you with a set annual salary which is not contingent on the amount of billable hours you have. In addition to receiving the same benefits as a W-2 hourly employee, being salaried can give you a steady paycheck even in-between clients along with vacation days and other minor perks.
Firms are gradually directing consultants towards becoming salaried so they can have more discretion on the staffing process and to guarantee they have a bench for projects, as opposed to letting consultants shop around between firms with each contract.
One of the primary reasons one would want to become salaried is generally related to risk tolerance. Being salaried, it would seem that you are more likely to have a guaranteed stream of income, regardless of how the market is. However, it is very common for salaried employees to be terminated if the market is not doing well, as we noticed during the 2020 Coronavirus Pandemic (See Article). Salaried consultants have also been told they are not allowed to use vacation days due to project timelines and work longer hours without overtime pay.
Being salaried could hinder your earning potential. Depending on the rate, you could work as a W-2 hourly consultant and still make more than a salaried consultant’s yearly income in under 9 months (See Rate Calculation). So while you may not have your 10 days of paid time off, you could conceivably take almost 3 month off and still make more money than a salaried employee. One caveat to note here is that W-2 hourly contractors may have more difficulty in planning time off.
If you are thinking of going down the salaried route, be sure to consider the following before making the jump:
- The market is over saturated (too many consultants, not enough opportunities in which case salaried couple provide a job that may be hard to find elsewhere)
- The project is not demanding (less hours for the same salary)
C2C (Corp-to-Corp) Contracts
Corp to Corp (or C2C) means one firm is subcontracting through another. If you are self-incorporated (proprietorship, LLC, S-Corp, etc.) you’ll be able to negotiate a higher hourly rate (because your firm is taking on the overhead). This holds the most potential to make the most money, but is a time investment and can be difficult to find contracts (i.e. your network may be limited).
All the benefits and tax implications mentioned above are now the responsibility of your firm, meaning the additional money you make will need to go towards the overhead and benefits for your company.
In most ways, even with having the responsibility of overhead and benefits, this is a better option since not only will you have more control over your options/choices, but you will have more money in your pockets compared to being on a W-2 hourly contract.
The firm you are subcontracting through (also called a pass-through firm) will still take a burden of the hourly rate, despite only having negligible ongoing costs associated to staffing you, so be careful. It is important to understand that since you are removing most of the power of the pass-through firm, it levels the playing field, so you should just need to negotiate your rate.
W-2 Hourly vs Salaried Rates
Due to the complexity involved with calculating C2C rates, we will only show the difference between the W-2 hourly vs the salaried income:
Let’s say a client billable rate is $140.00 dollars. The consulting firm takes 37% of the billable rate as part of their margin, overhead, and fees, leaving you with a 63% take-home rate, which is relatively high in the industry.
$140.00 x 0.63 = $88.20 per hour
If you are on a W-2 hourly contract, this would be the final rate you receive from the consulting firm. Assuming there are 252 work days in a year, with 10 days of vacation, that makes your annual income:
$88.20 x (252-10) x 8 = $170,755.20
As a salaried employee, from what we have heard average around $120,000, meaning your hourly rates (without overtime pay) will be:
$120,000 / (252 x 8) = $59.52 per hour
This means that assuming you work the same work days, you will make $57,811.20 more than being salaried (with 10 days of unpaid time off being hourly).
Now let’s say as an hourly consultant, you take 3 month off of work (which we will assume is 60 work days).
$88.20 x (252 – 60) x 8 = $125,475.20
Even if you take 3 full months off, you will still make an additional $5,475.20 with 3 months of vacation!
Please note that these rates are only examples, and are not going to be the case for most contracts you find out there. However, we would like to use this to point out how large the discrepancy in pay can be between a W-2 hourly position and a salaried position.
Therefore, whenever you are offered a salaried vs W-2 hourly position, be sure to calculate the rates and numbers before deciding which option to take. More often than not, the W-2 hourly will lead to more compensation.
We want to make sure that you have the information you need to understand the differences of the various types of Epic contracts before making decisions. If you have any additional questions, please feel free to reach out to us at firstname.lastname@example.org.