Per diem contract rate calculation

Written by tamara wilhite
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Per diem contract rate calculation
Contractors need to understand their rights as independent workers. (PhotoObjects.net/PhotoObjects.net/Getty Images)

Per diem is Latin for "per day". A per diem contract rate is a contractor's pay rate per day. When contractors bid services, they can quote a rate per hour, per diem or per project. Per diem contract rate calculations must factor in labour costs, higher self-employment taxes and benefits, which employers do not pay to contractors. This results in per diem labour costs typically being higher than the pay rate for employees. Per diem contract rates can be tiered, based on the service provider's skills, expertise or abilities.

Skill level:
Moderately Easy

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Things you need

  • quotes from health insurance providers
  • average annual pay rate for your profession or skill set

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Instructions

    Calculation

  1. 1

    Research the average annual pay rate for your profession or skill set for a full time job in your area. This can be found through salary calculators and the Bureau of Labor Statistics wage data by area.

  2. 2

    Divide that annual pay rate by 2080. This converts the annual pay rate into an hourly equivalent rate of 40 hours a week, 52 weeks a year. For example, an employee who makes £26,000 per year has an hourly equivalent rate of £12.50.

  3. 3

    Multiply the Social Security and FICA rates to the income taxes that will be paid for a factor that must be applied to your hourly equivalent rate. According to the United States Internal Revenue Service, "the self-employment tax rate for self-employment income earned in calendar year 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare)." Multiply the hourly equivalent rate by 1.133 (113.3 per cent). The result is a per diem rate that takes into account self-employment taxes. An hourly equivalent rate of £12.50 multiplied by 1.13 to account for self employment taxes equals a £14.10 per diem contract rate.

  4. 4

    Determine the costs of benefits, supplies or other business expenses likely to be incurred on a job. If these costs are constant per month, such as health insurance, divide the cost of these benefits by the number of hours expected to be worked. For example, if health insurance costs £325 per month and you expect to work 100 hours per month, the cost of health insurance will equal £325 divided by 100 or £3 per hour.

  5. 5

    Add the cost of benefits to the hourly equivalent rate to cover the cost of benefits for a total hourly equivalent rate. The cost of health benefits can be acquired by getting quotes from health insurance providers. For example, a £14.10 per diem contract rate to replace one's prior salary becomes £17.4 to replace employer provided health insurance.

    Per diem contract rate calculation
    Contractors need to include health insurance in their per diem contract rates. (Jupiterimages/Comstock/Getty Images)
  6. 6

    Multiply the total hourly equivalent rate by the number of hours worked per day to get a per diem contract rate. This is the amount the customer will pay per day for the contractor's time and services.

Tips and warnings

  • Per diem rate calculations can be further modified by adding in transportation costs to and from site, if desired.
  • When a contract is won with a specific per diem rate, if the contractor can complete the work for a lower cost than the per diem rate, the difference can be pocketed as profit.
  • Individual contractors must pay income tax on their earnings of at least 10% per year and up to 50% for high income tax states. Because contractors are not subject to income tax with-holdings, they must set aside part of their earnings and pay their own income taxes. The lack of withholding can make pay checks appear larger. However, penalties are owed if the estimated income taxes are not paid quarterly.

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