The benefits package a direct employee is typically worth 40% of the salary. Hence, a contractor without benefits or employment stability gets paid more to compensate.
I... think you may be mistaken.
I've heard that big companies have a total overhead of 40% for a worker, and that might be true once you factor in the cost of middle management and office space, though again it would vary a lot by pay (I imagine office space costs a large portion of a less well paid salary. Around here, quarter-million dollar a year SWEs get the same tiny desks you'd expect of someone making 1/4 that.)
but I've got a reasonable idea of what benefits cost, and it's nowhere near 40%, at least for a SWE in my jurisdiction, where total comp is so high and the benefits are... comparatively minimal.
1. health insurance
2. stock options
3. so-called "employer's contribution" to social security
4. 401k employer match contributions
5. sick leave
6. vacation
7. maternity/paternity leave
8. stock purchase plan
9. unemployment insurance taxes
10. 2 weeks severance pay
11. holiday pay
12. various legal rights contractors don't have
13. employer provided equipment that a contractor would be expected to provide
Here's the first hit on google:
https://www.bankrate.com/finance/financial-literacy/the-valu...
#1,3,4,5,6,7,9,11 add up to at most 30%
And #2,#8,#12,#13 could be worth 10%. I don’t think #10 is a guaranteed benefit, and usually is in exchange for forgoing any other grievances you might have against employer.
But that would be restricting it to highly paid, in demand professions. For other people (upwards of 80% of the US), many of the items on that list don’t apply to them, so I don’t see how it would cost 40% more for an employee versus contractor.
https://www.mysolo401k.net/solo-401k/solo-401k-contribution-...
A sole proprietorship is almost as easy to file as a 1099, and a good choice when a liability veil would be easily be peirced (as you're representing your own skills)
FICA is 7.65% up to $128k, then 1.45% after that. Health insurance is at most $500 per month (on average). That’s $6k/year, so somewhere around 3% to 12% of wages. Paid time off might be 2 to 4 weeks, so maybe 8% (4 weeks/52 weeks).
I don’t know how to value job security, possible severance, or being able to move up in a company, but it would have to be at least 20% to bump it all up to 40%. US has at will employment, so I don’t think I’d value that too much. Maybe you’re less disposable as an employee than contractor, but does it really matter if you don’t have union contracts stipulating certain processes?
However, I’d still charge at least double the hourly rate of an employed person to be a contractor since you need to cover the risk of not finding future work, but obviously that depends on what your competitors are willing to work for.
https://www.bls.gov/opub/ted/2018/mobile/employee-and-employ...
I suspect that there are 3 classes of people when talking about employee benefit costs (in a employee vs contractor discussion):
1) Private sector, high pay professional - I would agree benefits could be around 40%, but this also only applies to maybe top 20% of non government employee population.
2) Government employees, maybe even more than 40% considering their post employment benefits.
3) The bottom 80% of non government employees, who I doubt approach anywhere close to a benefit value equal to 40% of their pay.