Salary vs Hourly Rate - H2R Consulting

This information is intended simply as a guide for those of you who are looking to make the transition from being an employee on a salary to becoming an independent contractor on an hourly rate. If you employ contractors, this can help to explain why contractor rates can appear to be much higher than the salaried equivalent for the same role.

The information provided here is for general guidance based on our experience of the contracting market. We strongly encourage you to seek professional advice around tax and financial obligations.

One of the most common questions we get is “how much should I charge as an hourly rate?”. The answer to this depends on a number of factors:

The length of the contract. Short term contracts may justify a higher hourly rate vs longer term contracts of six months or more.
The scope of the assignment. Depending on the nature of the assignment if there is high demand, your hourly rate may increase vs low demand during quiet times. Be prepared to be flexible.

Your track record. If you are new to contracting you may need to charge a lower hourly rate to “get your foot in the door” and build up your reputation as a contractor. As you become more established and have a few good assignments under your belt, you can charge a higher rate as demand increases for you based on your reputation.

What hourly rate should I charge?

Contractors have to absorb a number of significant costs that are provided for employees. Simply dividing your salary by the number of hours you work each year will result in you under paying yourself. As a general guide, we use the formula of calculating your base salary + 35% (of your base salary) divided by 2000 hours to arrive at an hourly rate. (note we are now using 35% vs previously 30% to account for additional public holidays and changes to employee entitlements) The 35% is to account for:

No paid sick leave
No paid annual leave
No paid public holidays (Matariki an additional holiday from 2022)
Uncertainty of getting the next contract or contracts terminating early. eg: economic and political changes
Home office expenses, Office 365 subscriptions, Xero, Zoom, vehicle costs, car parking, electricity etc
Accounting expenses for compliance with tax obligations (GST, Prov Tax)
Professional indemnity and public liability insurance which contractors are usually required to have

So as an example, for someone on a base salary of $150K deciding to go contracting, their approximate hourly rate would be:

$150,000 (Base Salary) + $52,500 (35% of Base Salary) = $202,500

Approx Hourly rate = $202,500/2000 hours in the year = $101.28 per hour. If you are talking to a recruitment agency you would quote something in the region of 95-110 per hour as a ball park figure. Remember you need to consider all the other factors above as well. Below are some indicative rates (these have been updated in April 2022 to account for changes in public holidays and leave entitlements):

Base Salary Approximate Contracting Rate

$80,000 $54 per hour (range $50-65 per hour)
$100,000 $68 per hour (range $65-80 per hour)
$120,000 $81 per hour (range $80-100 per hour)
$150,000 $101 per hour (range $95-120 per hour)
$180,000 $122 per hour (range $115-135 per hour)
$200,000 $135 per hour (range $130-150 per hour)
$220,000 $148 per hour (range $140-165 per hour)
$250,000 $169 per hour (range $160-180 per hour)
$270,000 $182 per hour (range $170-200 per hour)

Remember, these figures are just indicative and tend to be aimed more at people starting out as contractors. Rates for certain skills vary depending on region (Wellington generally has higher rates than Auckland and other main centres because of high demand). Those of you who are established superstar contractors in high demand (yes we know who you are) will also have higher rates.

If you want an estimate of the market rate for contractors in your area of specialty, feel free to ask one of our contracting specialists for their view of the current market.

Provisional Tax and GST

Recruitment agencies are required by Inland Revenue to deduct tax from contractors at source before it is paid out to the contractor. The contractor needs to complete an IR330C form and nominate a level of withholding tax (WHT) deduction eg: 10%, 20% or even 0%. (A special application needs to be made to justify to the IRD that you are eligible for a 0% rate). Whatever is deducted by the recruitment agency and passed on to the IRD will be offset against your provisional tax payments so all you are effectively doing is paying your prov tax slightly earlier. If you want to see what IRD requires in terms of contractor tax deductions and download an IR330c form, click here.

GST Registration – Depending on how much taxable activity/ turnover you had on an annual basis, you are likely to be required to register for GST (most contractors are GST registered). It is your responsibility to ensure you comply with GST requirements and notify H2R of your GST status and GST number. You can find out the current GST registration threshold and requirements from the Inland Revenue website or click here.

Insurances

Most contractors are required to have a certain level of cover for professional indemnity (in case you gave incorrect advice) and public liability (in case you left your muffin in the toaster and burned their building down). The level of cover required is usually around $1M and $5M respectively. You can either buy your own insurance (in which case you will need to produce your insurance certificates) or take up H2R’s contractor insurance which is deducted from your hourly rate (about 60 cents per hour)

HNRY

If this is all too much for you and you want to outsource the accounting, GST and tax work then you can use a specialist provider such as HNRY who will look after all of this for you. You can check them out at www.hnry.co.nz