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What Is The True Dollar Per Hour Value Of An Employee’s Income?

Income CalcMost employees are liars.

Bold statement? Yes. The truth? You bet. The reason being is their thoughts on income are flat wrong. Even those who remember to calculate take home as their actual income are not 100% correct. Thus, each time a worker figures their hourly rate, they are lying to themselves and every person they tell. Here’s why:

Scenario: Paul, a single man, is hired as the new network admin of a medium sized business in Illinois. He signs the contract at the agreed upon $60,000 a year salary plus benefits, paid biweekly. Which is $28.85/hour on a promised standard 40-hour workweek. Great! Or is it? Let’s see what happens to that money by the end of the day:

Taxes; The Instant Income Killer

  • Federal – the biggest hit to a paycheck. The fact that most people willingly give away 10% to 35% of their money without ever seeing it is simply amazing.
  • State and Local – varies by location but yet again another hit to one’s take home pay.
  • FICA – I’d imagine that most employees don’t think too much about this one. It’s just another amount the company has to take out. However, the employer has to match your expense. The number, therefore, should be doubled; as this is money your employer cannot pay you.

Thanks to these taxes, Paul’s $60k is in trouble! He is now taking home around $1,650 a paycheck or $44,000 a year. That’s $16,000 a year less than the amount on his contract! (And this doesn’t include the implicit $4500 a year for FICA his company is required to match)

His hourly rate has dropped to about $21 an hour with his 40-hour workweek. Being conditioned to paying taxes, it’s still pretty decent he thinks. Not so!

Unexpected Work

Once in a blue moon, the network requires additional maintenance. This, on average, adds about 10 hours of extra work a pay period. Paul’s pay has now dropped to $18 to $19 an hour. But wait, there’s more…

The Forgotten Variables

  • The Commute:
    • Travel Time = 1.25 hours round trip
    • Cost = $10 a day
  • The Pre-work Prep:
    • Getting ready for work (outside of normal morning routines) = 30 minutes
  • Lunch:
    • Too busy to bring a meal from home and too far to drive home, Paul is forced daily to eat out or order in = 45 minutes
    • Cost = $10 a day
  • The Post-work work:
    • Arriving home Paul has more on his to-do list, including training for certifications, catching up on emails, preparing presentations = 1.5 hours

Without thinking too much into it, Paul is adding 5 hours onto his work schedule… a day! This creates a final calculated hourly rate of around $10.50! Ten dollars and fifty cents! He voluntarily gives away $18 an hour.

What is Paul to do?

My overly simplified suggestion: If Paul created a small IT consulting business (with a proper tax strategy & minimal additional expenses) he could charge his $28.85/hour rate and work for almost a third of the time while making the same amount of money as his current full time job. Furthermore, he could hire more admins, a sales force and a manager as well as some outsourced workers… quickly allowing for a life of financial freedom. Now that sounds like a plan!

What’s your plan?

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