How to Make Sure You Don’t Get Financially Screwed When Choosing Between Two Job Offers

Take the money and run.

You think it’s a no-brainer to choose between a $45 and $40/hour job offer. Just hit the bid, baby, and don’t look back.

Not so fast, Jack.

Don’t just focus on the hourly rate. If you want to make the right decision, look at the whole picture and be willing to do a little math.

First, are the two offers even comparable?

If one is contract work and the other is a job, you’re pricing apples against oranges. And even if they were both job offers, you should look at the total compensation package, not just the hourly rate to get the full picture.

Here’s why:

If you focus only on the higher hourly rate you won’t realize that your annual take-home pay will be lower. And that’s BEFORE you add up all the EXTRA benefits that come from a job vs. a contract position.

By focusing on the hourly rate instead of your TOTAL take-home pay, you are falling into a trap.

You’re getting $45/hour as a contractor FOR THE HOURS YOU ACTUALLY WORK. If you work 40 hours a week for 52 weeks, that’s 2080 hours, or $93,600.

But you won’t work those hours, because there are 10 Federal holidays when the office is closed and you won’t get paid. That’ll cost you $3,600.

If you get sick or need 3 personal days, you’ll get stiffed by another $1,080.

You’ll have to pay 100% of your health insurance premium. Maybe you don’t want health insurance. Maybe you’re on someone else’s plan. Maybe you’re young, healthy and reckless.

But let’s assume you’re prudent and want health insurance.

The average monthly premium in 2020 was $456 for a single person and $1,152 for a family or $5,472 and $13,824/year respectively. Rates vary enormously in real life — this is just an example — it’s worth researching.

You will also not be eligible for the 401K plan, and get zero employer contribution a.k.a “free money.”

Your $45 just shrank to $36.10 to $40.12/hr thanks to no paid time off, sick days and the cost of health insurance. Even if you pass on health insurance, your hourly rate is now just $42.75.

Here are two more hard-to-put-a-price-tag-on things:

For one, you’ll get a 1099 rather than a W-2 and need to make sure you’re paying estimated taxes along the way or be hit with a big tax bill and a fine. If you’re an employee your employer will deduct your taxes with each paycheck.

Worse than that, one offer thinks of you like an expendable resource, while the other likely considers you a valuable asset worth investing in.

Sure, contract work gives you flexibility to take unpaid time off, but it also makes you disposable. You’re just a hired hand filling an uptick in demand, and you’ll be cut loose when demand falls, just when it’s hardest to look for work.

Now let’s take a closer look at that $40/hr job offer:

You make $40/hour or $83,200/year.

You get paid $3200 even if the office is closed for holidays. If you take 3 sick or personal days, you’ll earn another $960 for not working. That translates into you really making $42.11/hr. (You get paid $83,200 but work 1,976 hours rather than 2080 hours).

Let’s add a 4.5% match to your 401K contribution (70% of employers offer a 401K and 4.5% is the average match). That’s “free” money for which you have done no work. That’s another $3,744 a year or $1.80/hr.

That $40/hr job is really paying $43.91/hr, and that’s before insurance.

Now let’s add health insurance. If your employer subsidizes your insurance premium by 75% that’s another $1.97 to $4.98 you are getting paid per hour, using the rates noted above. Your share is only $0.66 to $1.66. Get the details of your prospective health plan and do the math to know how much your getting paid for this benefit.

Add the incremental insurance, subtract your share and that job is now paying $45.22 to $47.23 per hour vs. the contract job that’s really paying only $36.10 to $40.12 per hour.

Not all of the add-ons in the calculation are cash you can spend right away. But they have real value. Saving for retirement builds long-term wealth and having decent health insurance saves you from a catastrophic financial loss.

Remember also what you give up in work flexibility you gain in respect.

You’re viewed as an asset worth investing in and training. Turnover is costly to employers. If you’re doing a good job, they’ll want you to stick around — their incentives are aligned with yours.

A contract employer, on the other hand, is either 1) desperate to meet demand now but will fire you swiftly when it wanes; 2) wants to avoid the higher costs of employees vs. contract workers while looking more attractive on the surface; 3) thinks of employees like cogs in a wheel.

Get your pencil and paper out.

Do a like for like comparison and see where you’re truly better off financially. Avoid making a short-term, cash biased decision that will impact your long-term financial and mental health.