RE: Fair Cut (Long)

Subject: RE: Fair Cut (Long)
From: "Wally Glassett" <wallyg99 -at- home -dot- net>
To: "David Orr" <dorr -at- ORRNET -dot- com>, "TECHWR-L" <techwr-l -at- lists -dot- raycomm -dot- com>
Date: Fri, 30 Jun 2000 14:38:25 -0700

Not sure what David's purpose is in continuing this thread, but that
"complete picture" is just a pretty standard chart of accounts. Once these
are set up, and it can be done in QuickBooks, Peachtree and other PC based
packages in a few hours if you know what you're doing, they work for all
transactions and the actual work is very similar to entering data into
database fields or spreadsheet cells. The accounting software does the work
after that. That's what they are for. It is NOT rocket science. In addition,
using his own margin percentage for a 1099 contractor, 35% of $75/hour is
$26.25/hour to the agency for every hour the contractor works.

Let me also say that I have nothing against agencies. Over the last decade
about half my work has come through agencies, and I am glad they do all that
"stuff" that would literally drive me crazy. However, none of us contractors
should pretend that our welfare is at the top of their priority list, or
that they don't make a very nice gross margin/markup from our

Finally, if David, or anyone else, wants the last word on this thread,
they've got it as far as I'm concerned.

Happy 4th to all of you,

Wally Glassett
Tech Doc-It, Inc.
wallyg99 -at- home -dot- net

Wally Glassett wrote:

>For a 1099 contractor the agency keeps 100% of their
>"cut" or margin. In the example given, $50/hr to the contractor and $25
>the agency, over a 6 month, 1000 hour contract that is $25,000 to the
>who, after finding and placing you, normally does very little beyond
>processing timesheets and invoices two times a month and sending the
>contractors 1099 information to the IRS once a year. That is a lot of
>income for not much work.

1099 contractors often charge more than W-2 contractors because they
have to pay their own Worker's Comp, Self-Employment Tax (equivalent of
FICA), and promotional expenses. Margins on these workers are typically
in the 30%-35% range for the agency.

>If you are a W-2 contractor then FICA, income tax and other
withholdings are
>taken out of the contractors $50/hour. The agency does pay other taxes,
>certainly not all of them. Many agencies offer benefits to W-2
>but they are not what anyone would call competitive benefits like those
>many employees.

Wally is overlooking that a W-2 contractor making $50 an hour is
effectively making $53 to $55 an hour because of the employer portion
of FICA and Worker's Comp. Also regular, staff W-2 employees make $25 to
$35, FICA and Worker's Comp, plus they get more extensive benefits and
more job security. The extra money contractors get is a premium paid
precisely because they do not get benefits and they face unemployment
when the project is finished.

Wally's examples narrowly focus on one part of a typical agency's
reality, which is what has to be factored into the equation, if the
agency is to stay profitable (i.e., stay in business.) To give a more
complete picture of the expenses involved in running an agency, I've
appended a list of accounts from an actual operating budget.

Orr & Associates Corporation
Operating Budget

Service/Product Income
Documentation and Training Services
Consulting Services

Cost Of Sales
Documentation and Training
Employee Wages
Independent Contractors
Payroll Taxes
Employee Benefits
Employee &Contractor training
Applied Expenses

Consulting Services
Employee Wages
Independent Contractors
Payroll Taxes
Employee Benefits
Employee & contractor training
Applied Expenses

Gross Margin

Marketing & Selling Costs

Payroll Taxes
Employee Benefits
Advertising and Promotion
Travel, Meals, and Entertainment
Employee & Contractor Training
Applied Expenses

Research & Development Costs

Payroll Taxes
Employee Benefits
Conferences Fees
Evaluation Software
Online Expenses
(Less) Employee & contractor training

Administrative Expenses

Officer's wages
Administrative wages
Payroll taxes
Employee benefits
Employee recruitment
Office supplies and expenses
Bank charges
Computer supplies
Dues and subscriptions
Professional fees
Office rental
Equipment rental
Travel & entertainment
Temporary services
Alarm service
Repair and maintenance
Depreciation and Amortization

(Interest Income)
Other Income
Interest Expense
Other loss/(gains)(bad debt, project losses)

Subtotal Income (Loss) Before Taxes
Officer's Incentive Bonus
Net Income (Loss) Before Taxes

Capital Budget

Computer equipment & software
Office furniture and fixtures
AV equipment
Moving and set-up expenses
R&D development costs
Total new capitalized expenses

M. David Orr
Orr & Associates/The Usability Group

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