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I occasionally get a job, perhaps to remind myself how much I dislike them. So four years ago, while living in Florida, I got a job at a day-labor company. Later, after I quit, I calculated my net hourly pay for my first week.
I made $2.71 per hour.
I’ll tell the rest of that story later, and I’ll acknowledge right here that there’s more than one way to calculate an hourly rate. But for me the crucial factors are how much spendable money is made and how many hours are needed to make it.
For example, if you made $34,000 last year did you make $17 per hour? That’s what it looks like if you divide the income by the standard 2,000-hour work-year.
But maybe you paid $4,000 in taxes on the income, and maybe you spent $90 weekly on a long commute and other work-related expenses. When you subtract those amounts your spendable income was just $25,320 for the year.
And maybe it took 52 hours per week to earn that money if you include commuting and other unpaid work-related time. That’s 2,704 hours for the year, which means you made… $9.36 per hour, not $17 per hour.
Yeah, it’s probably going to disappoint you, so why do the math this way?
Because knowing your real hourly pay lets you make better decisions.
For example, your calculations might show that an at-home job which appears to pay less than the position you currently have, actually puts more money in your hands thanks to savings from not commuting. Or maybe seeing what you actually make ($2.71 per hour?!) will motivate you to do something else entirely, like start a business or invest in real estate.
So let’s look at what you really make per hour…
How to Calculate Your Real Take-Home Pay
Estimate the gross annual pay for the job or freelance position you already have or one you’re considering. Then, to see what you really make, deduct every relevant expense, including these:
- Federal income taxes
- State income taxes
- Social Security and Medicare taxes
- Self-employment tax
- Commuting costs
- Childcare costs
- Anything you have to pay for to keep the income coming in
You can use the IRS tax tables to estimate your federal income tax. Keep in mind that they show what you’ll pay on taxable income, which is what you have after you subtract personal exemptions and standard deductions.
State income tax rates, which range from zero in Wyoming to as high as 13.3% in California, are also applied after subtracting any allowed deductions and exemptions. To estimate this tax look up the relevant tax tables online or use your last tax return as a guide.
Social Security and Medicare taxes take 7.65% of your gross income at the moment.
Self-employment tax (which is how you pay for Social Security and Medicare if you’re self employed) is 15.3% of your net profit..
To figure your commuting costs add up your bus, train, and taxi fares, or multiply the miles you drive by a reasonable figure. The IRS says it costs 53.5 cents per mile to operate a vehicle, but that includes insurance and other expenses that are paid regardless of mileage, so I use $0.30 per mile for my calculations.
Child care can be expensive, so it’s important to consider it when comparing jobs or other income opportunities. For example, a job with four 10-hour days instead of five 8-hour days can cut this cost by 20%, and staying home to work might eliminate it entirely. If you do pay for someone to watch the kids, include in your calculations the cost of going to and from the daycare provider.
Deduct from your source of income anything else you pay to keep that income flowing. This includes work clothes, tools, and therapy sessions needed to tolerate the boss.
Ignore educational expenses already incurred. Economists will (rightfully) tell you that these “sunk costs” are irrelevant to calculations regarding current or future income. But do include ongoing education expenses if required for your work (like annual classes you pay for as part of license).
Add up all these expenses for a year — and then divide that by 52 if you want a weekly figure. Subtract that figure from your projected annual or weekly income to arrive at your net spendable income. You’ll use that number to figure an hourly rate once you know…
How to Calculate the Time You Really Spend Making Money
Most people consider only their time at work when thinking about the hours needed to earn their pay. But it makes more sense to add up every single minute required to make the money.
Your real “work hours” include all the time from the moment you leave the house until you get home. If you regularly talk to the boss from home include that time too. If you drive to and attend any company events, add that time too.
You can measure the time it takes for your current commute. You can use Google Maps to estimate the driving time for jobs you’re considering.
If you work from home it’s easy to underestimate the time spent earning your pay, especially if you’re freelancing. For example, I might take three hours to write an article, but my total work hours include time spent doing edits later, submitting the article for approval, emailing and billing clients, writing articles that don’t sell, organizing my files, and much more.
In other words, it’s easy to forget some activities that are definitely part of earning your pay. Be careful to include the time spent on everything that is part of making that money.
Why all this calculating? By knowing how much time a source of income really requires, you can compare your options more honestly.
For example, a “40-hour job” with a long commute might actually take 54 hours of your time weekly, while a closer-to-home 40-hour job might require just 42 hours. If they happen to be similar positions and pay the same amount the choice is a no-brainer.
In a moment my own story will serve as an extreme example of how unpaid hours can drop your real hourly pay. For now, add up all the hours you have to spend to keep the money coming in. Then you can…
Calculate Your Real Hourly Pay
Once you know your actual spendable income and the actual hours spent to earn it, the math is pretty simple: Divide income by hours (on an annual or weekly basis). Here’s an example:
- Total spendable pay: $388 per week
- Total hours spent on all work-related activities: 44 hours
- Hourly rate: $8.82 (388 divided by 44)
Hourly pay isn’t the only thing that matters, of course. Bills are paid monthly, after all, and a 20 hours weekly at $15 per hour might not cover them, so a full time job at $11 per hour might be better.
On the other hand, a part-time job that nets you more per hour might leave you with time to start a small business or create passive income, and the latter may offer the highest hourly pay you’ll see for your efforts.
Enjoying a job matters too, so you may accept less pay for this reason. But how much less? Doing the math lets you make the decision more wisely.
So how much do you really make? I hope it’s more than I made from that job in Florida…
My $2.71 Per-Hour Job
Four years ago I briefly worked for a day labor company in Florida, and I calculated (too late) what I made during one week doing construction work.
It was the kind of place where you arrive early and wait to see if they have work. So Monday I left home at 5:45 a.m. and drove to the office. There was no work that day, so I was home at 8:45. Three hours for nothing.
The next day (leaving home at 5:45 again), I was finally assigned to a job at 7:45. It was 22 miles away. It took 45 minutes to get there, so I didn’t start earning my nominal $7.79 per hour (the minimum wage at the time) until 8:15 — two and a half hours from the time I left home.
And so it went. Here are my work-related hours for the week (measuring from the time I left home to the time I returned):
- Mon: 3 hours (no work)
- Tue: 11.75 hours
- Wed: (no work)
- Thu: 10.5 hours
- Fri: 10.5 hours
Total: 35.75 hours
And here’s what I actually made:
- Gross pay (24 paid hours plus $15 for transporting other employees): 201.96
- Taxes (payroll and income): $44.57
- Auto expense (202 miles total x $0.30/mi): $60.60
- Required work boots (I lied and wore street shoes): $0.00
Total Net Pay: $96.79
Real Hourly Pay: $2.71 !!!
Those calculations include the $5 they gave me each day to transport other employees to the job site, but it also include the time spent bringing those employees back to the office at the end of the day to get their checks (we were paid daily).
I wish I had done the calculations sooner. After quitting that job I worked at home as a search engine evaluator for $13.50 per hour, and I kept much more of that (about $11 per hour), partly because I had just a ten-second zero-cost commute from my bedroom to my home office.
The lesson of the story: It’s probably a good idea to calculate your real pay. (Another lesson: It’s probably a bad idea to work for a day labor company.)
Do you know your real hourly rate? Tell us how you calculate pay and compare job options… and keep on frugaling!