How Much Money Can I Make as a Fractional Employee?

I’m Taylor - the founder of fractionaljobs.io. We help senior talent become successful fractional operators, and we help companies reach and recruit that senior talent directly.

I’m also a Fractional Head of Product, specializing in early-stage startups. In my practice, I work with 3 startups at a time for 10 hrs/week each.

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How Much Money Can I Make as a Fractional Employee?

Fractional employees do have the potential to make significantly more money than they would as a full-time employee. The gross pay potential is higher, and your tax rate is lower. It’s a double whammy.

This playbook aims to do two things. We’ll first walk through your gross pay potential to understand why it’s higher than an equivalent full-time job. Then, we’ll see how several tax advantages turn your gross pay into even higher net take-home pay.

When all is said and done, assuming a full slate of client work, it is unequivocally true that a fractional employee will take home more money when compared to a full-time salaried job.

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Warning: Please understand that this playbook is meant to be a guideline for how to think about your take-home pay potential as a fractional employee. We designed it for those that are used to receiving a salary for full-time work, and are not as familiar with fractional work (i.e. independent contractor work). This playbook is not your accountant. It does not know your specific circumstances. It should be treated as a rough guideline.

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With that said, let’s break down how fractionals get paid!

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Calculating Your Rate

Rule of Thumb

Let's imagine Jordan, who is a Director of Operations at a BigTechCo. He’s making $200,000 in base salary, with a bonus of $25,000. For our calculations, we’re going to ignore any equity grants, because there's such a wide range of potential value. Fractionals can get equity too so it’s basically a wash anyway.

To calculate an hourly rate, the rule of thumb is to start with the base salary from your most recent full-time role. Jordan made $200,000 in base salary. Therefore, as a fractional COO, he should shoot for an hourly rate of $200/hr. Yes, just remove three zeros and add an /hr to the end of it.

This is the “goal” hourly rate. It does not mean it’s what Jordan will be charging on Day 1.

Adjusting the Rate Up and Down

Jordan, our new fractional COO, might want to adjust his rate up if his background is particularly unique. Perhaps he’s a former founder, or has extremely unique industry experience.

More likely, Jordan might want to adjust his hourly rate down a bit. If he’s just starting out, he may want to get some successful client work under his belt first. Or, perhaps Jordan is looking specifically to work with very early-stage startups and is happy to be compensated less for that opportunity.

As a rough guideline, Jordan should be looking at an hourly rate of $150 - $200/hr to start. As he progresses in his fractional work, that number can go up. No need to wait for annual performance reviews either! The most experienced fractional leaders are making north of $500/hr.

Does That Rate Seem High?

If we do some quick math, Jordan’s $200/hr rate at 40hrs/week is an astonishing $480,000 per year! Surely, this can’t be right?

It’s not right. In reality, Jordan won’t be billing 40hrs/week. He needs to spend some time on generating new business, among other non-billable duties. And when one client rolls off, he might not have a new client starting the very next day. Most fractionals find that about 30hrs of billable work a week feels like a full-time job when all the other fractional work is considered. If you’re not sure what other work we’re talking about, read How Does a Fractional Job Work?

A fractional employee’s hourly rate also accounts for the expenses we incur. Fractionals pay for our own equipment, our own SaaS licenses, and the dreaded health insurance. Nor do we get paid for our vacation time!  Your hourly rate accounts for all of this.

The hourly rate might seem high, but in reality Jordan will be making less than $480,000/year when everything is factored in. We’ll see how much he will be making soon.

The Monthly Retainer

Fractionals are generally paid on a monthly retainer, meaning $X,000 per month, for a set commitment of hours. A simple hourly rate is also a common alternative, though.

With Jordan’s hourly rate of $200/hr, if he secures one fractional client for 10hrs/week, he might shoot for a monthly retainer of $8,500 (there’s 4.34 weeks in a month). Some weeks he might work more than 10hrs, other weeks might be a bit less. But the expectation is that it evens out over time.

Stacking Clients

Of course, the whole purpose of fractional work is to work with multiple clients at a time. Jordan may choose to stack two, three, or more clients together. The more clients you stack together, the higher your gross pay is.

If Jordan secures three clients at his monthly retainer, he’d be making about $25,500/month billing 30hrs per week. Or perhaps, he secures two clients at his monthly retainer, and two more clients as a hands-off advisor. For the advisory work, he charges $2,000/month for 2hrs/week. This would equate to about $21,000/month for 24hrs per week of billable work.

One of the beauties of fractional work is that you determine your limit. The more you work, the more you make. And while Jordan isn’t making $480,000/year (yet), you’re probably starting to see how the math still works out in Jordan’s favor. This is just gross pay, too. We’re about to start factoring in self-employment benefits and taxes.

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Self-Employment

Because fractionals are independent contractors, it typically makes sense to set up what’s called a single-member LLC (legalese for a business-of-one, or self-employment). This adds some cost, and some accounting headaches, to the fractional life. As we’re about to walk through, it’s well worth it though.

A little tip: The best and easiest way to handle your business incorporation, back-office needs, and accounting needs is to sign up for Collective.com. Use code “FRACTIONALJOBS” (I’m a customer too), and you'll get one month free.

Incorporation

If our fractional COO friend Jordan incorporates, it now means his clients pay his business, not him directly. His business makes revenue and it has expenses. It also pays its employees a salary (yes, it’s Jordan paying himself a salary). And finally, it pays its owners a profit distribution (yes… it’s Jordan paying himself again).

Jordan’s getting all the money at the end of the day, so why bother? It’s because now the business can do what businesses do best - save money on taxes.

How to Save Money on Taxes

There are several key ways. Each one could be its own blog post, but our goal here is to just give a high level overview.

1. Business expenses - Jordan can reduce his taxable income by declaring business expenses. Everything from the coworking space to that client dinner to that work trip. As long as it’s within IRS guidelines, you’re free to expense it and reduce your tax bill. Just like David from Schitt’s Creek!
2. Profit distributions - The salary that Jordan pays himself is subject to payroll taxes. Bummer. But Jordan’s profit distributions that he also pays himself is not! Either way it’s all going to Jordan, but because he’s incorporated, a big percentage of his take-home pay is not subject to payroll taxes. A full-time employee has to pay payroll taxes on their entire salary. For further reading on this, check out Collective’s guide to a “Reasonable Salary”.
3. Reimbursements - The IRS allows us to deduct home office expenses (a % of rent, electricity, phone bill, internet bill, home cleaner(!)), and other expenses. We then pay ourselves a reimbursement for this expense with pre-tax money.

This might feel like a lot of work. Thankfully it’s not. There are services that handle ALL of this for you automatically. You don’t have to do a thing.

The service we recommend to every fractional is collective.com. Referral code "FRACTIONALJOBS" for one month free if you want to sign up. I use them myself and love them, otherwise I wouldn't be recommending it. There are other services too, as well as good old-fashioned accountants who can still do all this work for you.

Take-home Pay

Your take-home pay is the amount of money that hits your personal bank account after all of the complexities above. Because of business expenses, and profit distributions, and reimbursements, your effective tax rate will typically be quite a bit less than your effective tax rate as a full-time employee.

For Jordan, when he was making $200,000 per year as a full-time Director of Ops, his effective tax rate was likely around 30 - 35% (depending on other income, his State, etc.).

For Jordan as a fractional COO, if he also made $200,000 per year in gross revenues, his effective tax rate would likely be around 20 - 25%.

That’s about a 10% point difference in take-home pay. Jordan the full-time employee takes home about $135,000. Jordan the fractional COO takes home about $155,000.

Now factor in that Jordan has the potential to make quite a bit more than $200,000. And then factor in that Jordan’s former employer was also paying about 10% payroll tax on top of Jordan’s salary. That’s $20,000 that could have been saved by the employer or paid to Jordan if he was instead working as a fractional COO.

Keeping gross salary the same, Jordan and the company both get to keep more money at the end of the day. And that, friends, is the beauty of self-employment.

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Fractional employees have a higher gross pay potential. Ultimately, the gross pay is up to you and your skillset. Use our rule of thumb from your base salary as a starting point to determine what your potential might be. Then, reduce it to both be safe and practical. Then, project out different scenarios of working with clients for 10, 20, 30 or more hours per week. Chances are, you’ll be pleasantly surprised.

Fractional employees also have a lower effective tax rate. Even if your gross pay was the same as your previous full-time job, you’ll very likely be taking home more money as a fractional employee.

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We hope this guideline was helpful. It’s indeed complicated! Way more so than just collecting a paycheck. But for us fractionals, it’s worth it. If you have questions about your gross pay potential or taxes, feel free to email us at hello@fractionaljobs.io.

And if you're wondering how to increase your gross pay potential, the sole purpose of the site you're on right now is to 1) find you great leads for fractional work, and 2) give you the resources you need to build your own successful fractional practice. Subscribe to our email alerts if you haven't already!