How to Calculate your Hourly rate?
By: Arvind Ven
Do you really know how much you are ACTUALLY making with all the hard work, company politics and long commute? When evaluating job offers, keeping a cool head and carefully weighing the pros and cons are crucial. Once you make your decision, you are done and mistakes can be costly and painful. Today we will walk through the process of how to calculate your hourly rate when considering the value of a job offer.
Determining the Value of your Job Offer
Chris is an Engineering Manager at a large tech company in the San Francisco Bay Area and is making $150,000 per year. He has a wife and two young kids. While his wife had a career as a marketer, she wants to spend some time with the kids until the youngest one goes to first grade. Chris’ daily commute is less than 30 minutes each way.
The company gives a bonus of 20% annually and that has been arriving in full every year the past few years due to the robust economy. The health benefits are very good and there is no out of pocket payment. Managers onwards get company RSUs (Restricted Stock Options) equaling $120,000 in total vesting over four years. At current market price, Chris can pocket $30,000 (before taxes) every year from RSU’s alone.
To summarize, Chris’ total annual gross income is $217,500. His Taxable amount after 401(k) contribution = 217,500 – 18,500 = $197,000
Chris gets an offer from a ‘hot’ startup that offers $180,000 and 100,000 stock options. There ‘may’ be a 10% bonus dependent on a number of factors, many of them beyond Chris’s control. Chris is excited and wants to start right away. His wife worries about the long commute (the ‘hot’ startup is in San Francisco, and a 90- minute commute each way), the long hours of work expected in a startup and whether said startup can raise the next round of funding.
Total annual taxable Gross salary: $180,000
Taxable salary after contributing $18K in 401k: $164,000
What is the Hourly Rate for Each Job?
Let us keep it simple and assume that Chris’ overall tax rate is 40% (31% Federal, 9% CA state).
Chris’ AFTER tax income at the current company: 197,000 x 60% = $118,000
Chris works 50 hours per week at the current company including commute time. Accounting for two weeks of vacation, 50 hours/week multiplied by 50 weeks per year makes 2500 hours per year worked.
Therefore, hourly rate at the current company: $115,000 / 2500 = $46.08
Companies add another 20% or more to an employee’s compensation to account for the benefits (holidays, health benefits) to arrive at the loaded cost.
Adding another 20% to $46.08, brings the total after tax amount for Chris’ hourly wage to: 46.08 x 1.2 = $55.30
THIS is how much Chris makes at his current job! Therefore, hourly rate at the current company: $115,000 / 2500 = $46.08
Hourly Rate for the Startup Job
Total gross pay after 401k contribution: $162,000
After tax income assuming that 40% goes to taxes: $162,000 x 0.6 = $97,200
As it is a startup, Chris is expected to be a ‘team player’ and work longer hours. With his longer commute, he is now clocking in 70 hours per week. Again, assuming 50 weeks of work /year and two weeks of vacation, total hours per year comes to 70 x 50 = 3500 hours.
Chris’s AFTER tax hourly rate now becomes:
$97,200 / 3500 = $27.80
Add 20% for benefits and that NET hourly rate is now
$33. 30 ($27.80 x 1.2)
These numbers may vary based on your personal tax deductions, company benefits and IRS 1040 Form Schedule A deductions.
Now, Chris has 100,000 stock options in the startup. While that sounds like an impressive number, what does that mean? How do you value that?
Now, that is a more complicated calculation and is best covered in a future column. Let us start with the knowledge that only 5% or less of startups end up in superstar status like a Facebook or Google. Some stumble along and a great majority end up at the great beyond for startups.
So, should Chris quit his ‘stable’ job and take the startup offer? That will depend on his (and his family’s) appetite for risk.
In conclusion, remember that EVERY single dollar that you spend is an AFTER TAX dollar. In the end, what really matters is what you keep after taxes. In addition, you should also figure out how much time and effort you are putting in to get those after tax dollars.
Do you have questions about potential job offers? Let our team help you work through the math! Contact us today.
Arvind Ven is Founder/CEO of the Capital V Group, a Registered Investment Advisory firm. He has an MBA from the MIT Sloan School and a Master’s Degree in Computer Engineering.
Arvind Ven is a Registered Representative with, and securities offered through LPL Financial. Member FINRA & SIPC.