The financial mistakes behind why a startup laid off 400 employees overnight
I read this and then the comments. A fundamental take away of many is that switching from contractors to employees was wrong. I think it was right, but the way they did it was wrong. They could have done the shift slower, planned better, and not have had as many problems.<p>The gig economy done right is a great idea. Right being fair to both the contractor and the employer.  Problem is, I almost never see it done right. Instead, I see gig economy workers being taken advantage of left and right.<p>Let&#x27;s take the middle of the pay, $13 per hour. For comparison, median pay for plumbers in 2017 was $20.17 per hour[1]. Figure 2080 paid hours in a year for a contractor for our purposes (that&#x27;s no vacation). That&#x27;s $27,040 per year gross. Now let&#x27;s adjust that to reality (i.e., net spendable income).  For ease, I&#x27;ll round to the nearest whole dollar.<p>First, taxes. $27,040 puts the person squarely in the 12% federal income tax bracket. Remember we are assuming fresh out of college, not married. Social security self-employment tax was 12.4% is 2017. Medicare self-employment tax was 2.9% in 2017. Let&#x27;s assume they live in a state that levies income tax (excludes WA, NV, WY, SD, TX, AK, FL), but they live in PA, one of the lowest tax rates at 3.07% in 2018. Let&#x27;s also assume no deductions for ease (unrealistic, but I am not a tax accountant). So that&#x27;s a total tax levy of 12%+12.4%+2.9%+3.07%=30.37%, bringing us down to $18,828.<p>Second, healthcare. You can&#x27;t say that this is for people with insured spouses, so healthcare is hand-waived. Instead, healthcare.gov defines affordable health care at 9.56% of salary. Typically an employer pays two-thirds the cost of the health care plan, so let&#x27;s say 28.68% and round up to 30% because insurance companies charge more for individuals (could easily be more than ~2% extra, but lets go with that).  That&#x27;s 30% of the initial gross, not our after taxes figure, so a cost of $8112, bringing us down to $10,715. That&#x27;s $206 a week, or $893 a month, to cover rent, food, transportation, internet costs (digital remote worker), and clothing.<p>To put that into perspective, it&#x27;s $1425 below the 2018 Federal Poverty Level for an individual: $12,140.  Some agencies compare the FPL to before taxes, some after taxes, but it&#x27;s still almost $1500 below the FPL.<p>Another thing is that gig economy workers are often asked to shoulder costs that would have been the responsibility of an employer, forcing some gig workers to work crazy hours or in crazy conditions[2]. In Zirtual&#x27;s case, gig workers could have been paying for their computers, internet, and any software when they were contractors.<p>When you are a contractor you need to be making 160% of what you would if you were an employee, to cover insurance, increased taxes, and expenditures that now come out of your pocket. You also shouldn&#x27;t be charging at a dollar rate, as it&#x27;s an accounting nightmare and lends itself to some clients (or gig economy startups) nickel &amp; diming you or micromanaging your time.<p>Instead, charge a flat weekly fee based on assuming each week you&#x27;ll work 36 hours on client work, 10+ hours on business marketing and administration, and that you&#x27;ll take a two week vacation. So let&#x27;s say as a fresh college grad I want to make the equivalent of if I was an employee making $45k per year. That means I need to gross $72k. Dividing that by 2000 hours to allow for two weeks vacation, I need to make $36 per hour. Remember that you have to assume you are only going to get 36 billed hours, so multiply that by 40&#x2F;36, which handily works out to $40 per hour (I swear I did not plan that). Now multiply that by 40 to get a rate of $1600 per week. That&#x27;s not contributing anything to your retirement or emergency fund (yes, you should start right out of college - I didn&#x27;t and regret it mightily). Especially if you are a contractor, you must have a enough in an emergency fund to last you 2 months without pay. So add  to your emergency fund, taking it to a weekly charged rate of $1760, until your emergency fund is 2 months. Put any windfalls (tax refunds, gift checks, etc.) into that emergency fund until it is up to two months of pay, and hopefully it will be there by the end of a year. Two years is more realistic.<p>If you are a more experienced contractor, things get wonky at the $128k level, because social security not longer applies and retirement stuff is different. If you are a contractor on the side (make sure your employer&#x27;s IPR agreement allows this, or get a explicit written statement allowing it), you can probably charge 120-140% of what you want to make from your contracting work.<p>Make sure your employer&#x27;s work comes first though, or you will find yourself out of a job. That also assumes you work for &#x27;Big Corp&#x27;, not a startup at the ground floor. If you work for a startup and you have non-trivial equity, you are working for yourself and should be pouring everything into the startup.<p>The cost of living comfortably relative to the average income in the U.S. seems to me to be higher now than it&#x27;s ever been in my lifetime (50 years). One estimate in 2012 says it took $150k to live comfortably in the U.S. then, and it seems to have gotten worse since[3].<p>I am not an accountant, a lawyer, a doctor, and you should not construe any of the above as legal, accounting, or medical advice.<p>[1] <a href="https:&#x2F;&#x2F;www.payscale.com&#x2F;research&#x2F;US&#x2F;Job=Plumber&#x2F;Hourly_Rate" rel="nofollow">https:&#x2F;&#x2F;www.payscale.com&#x2F;research&#x2F;US&#x2F;Job=Plumber&#x2F;Hourly_Rate</a><p>[2] <a href="https:&#x2F;&#x2F;philadelphiapartisan.com&#x2F;2018&#x2F;05&#x2F;17&#x2F;the-perilous-gig-economy-why-caviar-must-pay-for-bike-couriers-death&#x2F;" rel="nofollow">https:&#x2F;&#x2F;philadelphiapartisan.com&#x2F;2018&#x2F;05&#x2F;17&#x2F;the-perilous-gig...</a><p>[3] <a href="https:&#x2F;&#x2F;www.businessinsider.com&#x2F;the-basic-annual-income-every-american-would-need-is-150000-2012-3" rel="nofollow">https:&#x2F;&#x2F;www.businessinsider.com&#x2F;the-basic-annual-income-ever...</a>