What's a nice way to phrase this?
I think in this case, the way to go is polite, but simple and direct:
I would love to work with you, but I'm afraid I can't agree to the contract terms.
Many ways to proceed here. But do avoid the word "guys." Let's go:
I would like to assist your firm but the contractual terms are unacceptable.
While the offer of employment was appreciated, the terms were insufficiently attractive to proceed toward agreement.
This job is one that I would have taken, had the offer been reasonable.
Something along those lines would be professional.
Most contracts are multi-part documents. Frequently there are a number of terms that are part of the contract that one might object to, not just the compensation clause.
If you reply that the contract terms are not agreeable or are unacceptable and they wish to continue the negotiation, they will have to write back to find out which specific terms are disagreeable to you, prompting another exchange of messages.
You'll have to speak specifically about compensation during the next round. Why not get 'er done now?
I like this phrase:
"I'm not willing to do the work for the compensation offered in this contract".
Also once you've said that, you should make a counteroffer to propose an amount that you would consider doing the work for. Any reasons you have to justify why your proposal would be a fair price, include in your reply.
If you have a close relationship with the people offering the contract, you can definitely get away with being a little informal.
"I'd love to work with you on this project, but I'm sorry to say that the compensation offered / terms of the contract [delete as required] really don't do justice to the quality of my work."
Or something like that.