Your Posted Rate ÷ (1 − Your Total Cost Ratio) = Your True Effective Hourly Rate

When a recruiter says "we have a C2C rate of $85/hour," you're not seeing the full picture. That $85 is gross revenue to your S-corp or LLC—before self-employment taxes, health insurance, home office overhead, and the contractor markup you're already paying to your vendor. Your actual take-home effective rate is lower, sometimes significantly so.

The formula looks simple: divide your quoted rate by (1 minus your total cost ratio). But the cost ratio is where contractors get lost. Here's how to build it correctly.

Calculate Your Total Cost Ratio in Four Steps

  1. Tally your annual business expenses. Health insurance premiums (yours and dependents), home office utilities/internet, laptop and software subscriptions, accounting/tax prep, business liability insurance, and any vendor pass-through fees. Don't guess. Pull your last tax return or profit-and-loss statement. Most contractors find this number is 25–40% of gross revenue.
  2. Add self-employment tax burden. As a 1099 or S-corp contractor, you pay both employer and employee sides of Social Security and Medicare (roughly 15.3% combined). However, S-corps can reduce this via salary splitting; 1099s have no option. If you're a 1099, add 15.3%. If you're an S-corp, add 8–12% (because salary absorbs part of the load).
  3. Account for income tax drag. Your federal + state income tax rate varies by location and income bracket. Use your marginal tax rate, not your effective rate. If you're in a 32% federal + 5% state bracket (typical for mid-six-figure contractors), add 37%.
  4. Sum all three: expenses + self-employment tax + income tax = your total cost ratio. For a typical tech contractor, this lands between 45–60% of gross revenue.

Example: You're offered a $90/hour C2C role with a vendor.

  • Annual expenses: 30% ($35/hour equivalent)
  • Self-employment tax: 12% ($10.80/hour)
  • Income tax: 35% ($31.50/hour)
  • Total cost ratio: 77% ($77.30/hour)
  • Your effective hourly rate: $90 ÷ (1 − 0.77) = $90 ÷ 0.23 = $391/hour posted rate needed to clear $90 take-home

Wait—that's inverted. Let me recalculate: if you're quoted $90/hour and your cost ratio is 77%, your take-home is $90 × (1 − 0.77) = $90 × 0.23 = $20.70/hour actual earnings. That $90 is far too low.

For $90/hour take-home on a 77% cost ratio, the posted rate needs to be $90 ÷ 0.23 = $391/hour—which is unrealistic. More realistically, if the market offers $150/hour posted C2C and your cost ratio is 55%, your effective rate is $150 × 0.45 = $67.50/hour take-home.

Adjust for Contract Length and Overhead Gaps

The formula above assumes steady work. But contractors face bench time between contracts—weeks or months of zero revenue while you're searching. If you land only 80% utilization over a year (roughly 40 weeks working, 12 weeks between gigs), multiply your effective rate by 0.80.

Also: if you're new to the C2C market, don't assume your expenses stay constant. Vendor management, proposal writing, and contract negotiation take hours that don't bill. Many successful contractors add a 10–15% overhead buffer to their cost ratio in their first two years.

Why Posted Rates Mislead

Recruiters and vendors quote the gross rate because it's the largest number and looks impressive. A $150/hour C2C contract sounds like $312,000/year (150 × 2,080 hours). In reality, after taxes and business costs, a contractor with a 55% cost ratio clears roughly $140,000 net—still solid, but half the headline figure. Knowing this prevents you from undervaluing yourself or taking lowball offers that look high in isolation.

The fastest way to compare offers across multiple roles is to plug each quoted rate and your known cost ratio into a spreadsheet. You'll immediately see which vendor deal actually pays and which is a trap dressed up as an opportunity. Many contractors use this exact comparison when evaluating contract boards and platforms that detect live C2C postings—because speed matters only if you're comparing like-for-like take-home figures.

One More Number: Minimum Viable Rate

Once you know your cost ratio, calculate the minimum posted rate you'll accept. If your take-home floor is $75/hour (adjust this based on your cost of living) and your cost ratio is 55%, divide: $75 ÷ 0.45 = $167/hour minimum posted ask. Anything below that wastes your time.

Track this number by role and geography. A $150/hour data engineer contract in Ohio might be your minimum; the same role in San Francisco needs $200+ because your income tax is higher. The more precisely you know your break-even, the faster you can say no to bad offers and focus on real opportunities.