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Switching to Contracting?
SoonToBeWorking asks: "I recently did a telephone interview for what I thought would be an absolutely wonderful job. It is primarily embedded Linux, with a stable employer that was less than 10 miles from my residence. The interview went extremely well, until the end. The position was listed as full-time but they want me to come on as contractor because the approval is easier to get. Then, I am told they would move me to full-time. I'm recently married, and looking for stable income because I have more than myself to look out for now (kids are not present or on the way for several years yet). I've never contracted before, so I am in unfamiliar territory. I hear a lot of good things -- 3-day work weeks and crazy amounts of money, but is the lack of stability worth it? I know I need my own health & life insurance, but what else? How do I convert my base salary to a contractor rate? Without a 401k or a 403b, how do I take care of retirement?"
As a contractor, you will have to pay the employer's share of FICA taxes. That's ~13.4% of your income that is automatically lost to taxes, before you figure regular income taxes or anything else.
In my state, and I suspect most others, the rate you want to make per hour should be increased by a third to take into account the taxes you will have to pay. Be aware that not only will you have to pay all the taxes that were taken out of your check, you will also be responsible for the matching your employer was paying. Do not forget general liability insurance as well as unemployment, etc etc. Although you might want to receive $20 per hour in pocket take home, you will need to bill around $50 per hour just to cover all your expenses. Maybe even more.
Be smart and incorporate. This protects your personal assets to a higher degree and makes things a lot easier. You will need an accountant to help you out. Although lots of people will say you can do it yourself, my accountant saves me far more through his knowledge of the system than I could ever save not paying him.
And finally, the benefit. Every cost you incur in your business is pretax deductible. Every cost you incur as an individual is after tax. This makes it very smart to be in your own business just for the tax savings of things you would buy anyhow.
Tis better to be silent and thought a fool, than to open your mouth and remove all doubt --Abraham Lincoln
At the co. I work for, the multiplier is 1.5.
Or, calculate the cost (if you can even get it) to purchase appropriate health insurance, life insurance, equivalent vacation days, etc.
My employer has contractors and employees--we're a consulting firm. Contractors who are worth a damn stick around as long as they choose to. Same thing with employees.
I suppose, as a consultant, getting laid off from a job is irrelevant. One job ends, the next one starts. In 10 years of employment, I've had 1 week when I didn't work, not counting planned vacations. During that week, I could have done minor jobs, but I wanted the time with my wife before going out of town.
If you see a "permanent" position as somehow more stable or respectable, or as a guarantee that your family will be secure then you're fooling yourself.
"Reality is that which, when you stop believing in it, it doesn't go away." - Philip K. Dick
I did the calcs at two diff. jobs over the last four years, and the break-even point was around 25% in one, 35% in the other (extra salary needed to buy missing benefits: health, paid vacation, retirement).
Stability is great, but being unemployed is also stable.
Remember (and try to find a polite way of letting your employer know) that you can only offer the level of commitment to them that they are prepared to offer you. There is very little security in contract work, but there is also little security in the first few months of a full-time position. Make sure that your contract time will count against any probationary period that your company mandates and that your benefit waiting periods will be reduced by the amount of time you work under contract (assuming they do hire you in 6 months).
It's not a bad idea to let your employer know that you don't consider the contract position as a real job and you will still be looking for a real job until they offer you a full-time position.
On the other hand, the company I work at has hired nearly a dozen tech resources as contractors over the past two years, and except for one that was determined not to be a good fit for the position, all of them so far have been converted to full-time employees after 12 months on the job.
Companies tend to like making contract-to-perm offers these days not to screw members of the workforce, but to make sure that members of the workforce don't screw them. Is it justified? I'm not sure.
I contracted out for about a year to a company.
Made some damn good money because contractors get something regular employees don't get.... overtime pay.
Putting in all those 60+ hour weeks don't seem so bad when you're getting time and a half for all the hours after 40.
The only downside for me was the fact that I didn't get any benefits like vacation days, or health insurance, but my wife's job carried the health insurance for my family, so we were good.
i would view contract-to-hire as a mutual try-before-you-buy period, during which you get a feel for the workplace and the employer evaluates your performance. if the contract is not renewed, your resume just lists a contract job that was completed.
contractors in the usa are often reported to the IRS via form 1099, with no withholdings or employer contributions for medicare, social security, health insurance, state and federal tax, disability, etc., so you would should expect to pay for those out of pocket before you count your loot.
good luck!
about sean dreilinger
GST 10%
Payroll tax 8%
Professional indemnity insurance ~3%
Public Liability insurance ~3%
Annual Leave: 20 days/yr
Public Holidays: 5? days/yr
Long service Leave: 6 days/yr
Special Leave: 3 days/yr
After doing this, you end up with the gross salary you would receive as an employee. As very rough guide, work out your hourly rate as an employee then double it to get what you should be charging to get the same money as a contractor. Of course you must figure out what premium you want to charge for lack of income security (or insure your income).
The correct answer to "What should I charge?'" is "What the market will bear". If your client raises their eyebrows at your hourly rate, then pays anyway, you are probably about optimum.
An Australian specific answer, but hopefully of some help.
As a side note, that Google 'own hobby/project time' deal involves a hobby/project that is related to work and could potentially benefit the company, and is still company owned work.
Hunt your preferred prey at Aliens vs Predator MUD. Join the war at avpmud.com port 4000
If this company is large, well-established, and been around for a while, and not a younger (less than 5 years), smaller sized company, then odds are they are telling the truth about easier to hire contract.
Of course, the fact the position is advertised as full time, and they are now telling you it is contract, and that the reason is because it is easier to get approval, then that means the position your going for may not be fully funded.
Bottom line: Ask questions. Questions such as:
Is this position fully funded already, or is that why you need approval?
If it is funded, as a contractor (i.e. temp), how long is it funded for?
Does the company have any restrictions on how long you have to work as a contractor before being eligible to go perm?
How long until this position is moved from contractor to perm?
When moving to perm status, will benefits start the first day, or will there be an additional probationary (no benefits) period beyond the time spent as a contractor?
Will you be working under a staffing company (where you are a regular employee of the staffing company), or would you be working as an individual directly with the company (W-2 versus 1099 in the US)?
:)
I've seen some companies use contractors as a way to check out the work and abilities of someone they are interested in hiring when the candidate does not have the "required" education or job experience they originally listed. It can be a great way to get a foot in the door of the company.
Of course, there are also companies that use contractors as a way to staff up and down with little penalties.
You should do your own due diligence, check out the company, their track record, things like that. If you'll be working for a staffing company, research them as well.
One nice thing about working for staffing companies, you submit your time card to them and they take care of all the billing and collecting. You are a regular employee of the staffing company. That means you have labor law protections. When you work as a contractor directly for the company, it's a simple business arrangement, meaning if they don't pay you, you can't use labor laws (easily) to collect. Plus, in several cases, the staffing company will pay you weekly.
. 62,400 repetitions make one truth -- Brave New World, Aldous Huxley
Warning: my information is about 3 years old (when I retired) so some of it might not be as valid now.
Check out realrates. It's a good resource for contractors with lots of tips.
Use an "umbrella" company. They'll "hire" you as a full-time employee and do all the paperwork and billing on your behalf with the client. You can also get health insurance and 401k through them. Good ones won't charge the high percentages regular agencies do.
For annual salary equivalent: take your hourly rate and multiply by 1600. Remember, you won't get paid for holidays, sick-leave, bench-time, plus you have to pay about 15% extra in taxes for being self-employed, and health-care etc, but you'll get a bit more tax breaks. While there may be more hours available in a year, you will not to be able to bill for every one of them, so be a bit conservative in your estimates.
Contracting can be as stable as full-time, sometimes even more, especially in large companies. I've survived several rounds of lay-offs as a contractor.
These days, there are tons of contractors in IT, even at lower managerial positions. You only need a full-time position if you want to make it into higher-level management and/or get stock options.
You may want to check out bringing a third party in to payroll. Someone like eWork http://www.ework.com/html/services/index.htm can payroll you and bill the client on your behalf. The benefit of this situation is that you would be a W2 employee of ework, avoiding the process of filing quarterly estimated taxes and keeping your own books. They often can extend group plan benefits to you at discounted rates, too. (I am not affiliated with ework.) If going independent/1099, make sure you bill enough to cover things like benefits, taxes, expenses, etc. A rule of thumb is to double the hourly rate that you would work for them as an employee (i.e. if you'd work full-time with bennies for $20/hour, charge $40 as an independent). Also make sure you cover your butt on contract details like overtime/off-hours work, minimum hours worked per week, job/task description, worksites, travel time/expenses etc... my $0.02
Never trust anyone who takes pride in being called a 'geek'....
I did work under a similar arrangement for a while. I used a company called mybizoffice.com for the benefits. They're generally called an "umbrella company" or an "employer of record". It made getting a mortgage recently _much_ easier.
I had no complaints with MyBizOffice. There are other options, but they were the only ones with a good web interface at the time I was in the market (July 2003).
-jbn
Yes, contracting is scary. if you can do W-2, then you don't have to worry as much about estimated taxes.
Roll your 401K into an IRA at a repitable bank or investment firm, be good about puttin money from your contracting fees into you new IRA.
I have been looking for FT perm since I was layed off from a Sys Admin/Citrix Admin positions, fools. a year ago
I have been contracting on 4 1-2 day a week projects, paying my bills and gas money ( the gas part hurts)
anet Ruhl's Answers for Computer Contractors: How to Get the Highest Rates and the Fairest Deals from Consulting Firms, Agencies, and Clients ISBN: 0964711621 Buy it from your favorite online bookstore and have them overnight it to you!! You are on unfamiliar territory and can very easily be taken advantage of. There are a lot of pitfulls with computer consulting/contracting. However, the rewards are well worth it if you know what you are doing.
Go not unto/. for advice, for you will be told both yea and nay (but have nothing to do with the question)
Yep. When I was young and naive, I said I didn't want to contract because a full-time "permanent" position was so much more stable. Then two full-time "permanent" jobs evaporated on me in the span of a year.
Tom Swiss | the infamous tms | my blog
You cannot wash away blood with blood
I've been both an employee and a contractor. In fact, I've been both for the same project at the same company once. Here's some thoughts.
I doubt that you'll actually get converted, because that's a second headache for them. If it turns out they love you, maybe, but not normally.
It's a lot more money; maybe 50% more than the guy sitting next to you doing the same job, particularly if you're an independent, rather than going through a contracting company. However, there is some added work and expense; you need to figure out how to pay your taxes, and you need to get biz. insurance, and so on. The best thing to do it find an accountant that other contractors in your area use, go to him and say "what do I do?" You might even wind up starting a corporation to accept the checks, which is easier than it sounds.
If you start your own corporation, you can setup a retirement plan for yourself called an SEP, which works just like a 401(k). You can contribute whatever you want to it, and buy mutual funds and so on.
To figure your hourly rate, what you want to do is divide the employee version of the job by 1000. Like, if you'd make $100,000 as an employee, you'd like to charge about $100 an hour. You might not get quite that much, but that's the goal.
One thing about your salary goal--it's not quite as much more than an employee as it first seems, because of the biz. expenses an employee doesn't have (accountant, taxes, etc). But it's still pretty good.
Another way to figure your hourly rate is to divide your yearly salary goal by 1840 hours. That's about 46 weeks, which is about how many you can work...you don't have any paid holiday or vacation days or sick days, so need to figure those in. 6 weeks of non-work is pretty safe. When I was a contractor, I found it hard to take a day off because of all the money I was loosing. :-)
Finally, there's health insurance. If you don't have some other coverage (like from your spouse), it costs a bundle...maybe $10K. I didn't have to do that, because my wife's plan covered me, so I don't know much about it.
Good luck, brother contractor.
I can only talk from experience as a contractor in Toronto for the past 8 years. Not sure how contracting works in the US but here contractors are usually incorporated. In my case my corporation get paid by the client and it (corporation) in turns pays me (and my spouse) a fixed salary every month from which I deduct taxes, retirement savings plan (for me and my spouse), etc.
Since personal taxes are higher in Canada, contracting makes sense because you have the advantage of income splitting as I outlined above. Also, many of my toys (PCs, PDAs, etc.) can be expensed out... subject to depreciation of course :-) Yet another advantage is you get to know more people (and make more friends) who can potentially be contacts for future gigs. If you do a good job, clients will be more than willing to hire you back.
Finally, learning is accelerated if one is lucky enough to work in different development projects and with different people who can add their own insight and experience to problem solving.
OK, you say increase your billing by a third, then you say go from $20/hour to $50/hour (an increase of 150%, not 33%)
... I'm sure I'm missing some stuff here.
Your general advice is right, but the numbers are way off.
I have been contracting (1099) for about 6 years. Here's what I can think of that you need to worry about:
* save the taxes your employer would have deducted
* also save the additional 6.2% on the first $87,000 you make for the employer's portion of social security and 1.45% of your salary for employer's portion of Medicare/Medicaid
* you may choose to pay your unemployment taxes (pretty low)
* pay worker's compensation (also pretty low)
* provide your own insurance. This is expensive; expect to pay more than $300 per month
* provide for your own vacation *and holiday*
* file estimated taxes 4 times per year. You can do without this, but you pay a penalty
* if you incorporate (I recommend it) DO IT IN DELAWARE. I paid $7000 in franchise taxes last year because I foolishly incorporated in TX.
* if you incorporate, pay your franchise tax. It should be $100/year
* you can deduct TONS of stuff. Insurance, medical bills, travel (track your miles driven for business), possibly rent a portion of your house to your business for office space, business meals, business trips,
Overall, I think the +30% figure is probably about right; maybe it's a little high. I figure it by a % added (8% for FICA + 7% for vacation) + my insurance cost (about $5k) and a little extra for the trouble. Of course, that's only for when you're asked to choose between contracting vs salary rates - you always ask for as much as you can get.
No doubt they're using this contract as an alternative to a probation period. If they don't like you after 6 months then it's easier for them to simply not renew the contract than it would be for them to fire you.
I've been a contractor on/off for nearly a decade now. Here are some helpful hints.
Last piece of advice. Do not think you will make more money out of being a contractor. You might. You probably won't. You will receive all sorts of shit from permanents who think you're raking in a million dollars. In reality, you're likely to be making as much as they are when all is said and done.
QUOTE
To top it off, to get my final paycheck he made me sign a document saying I had been a contract worker.. then he stiffed me for half my paycheck after I signed.
UNQUOTE
I cannot believe you did not go to an attorney. Plus have you ever heard of an SS-8 form? You can fill it out yourself and force him to pay your taxes.
I've contracted for almost 10 years now, and 1 thing I can tell you is, I've been out of work and on unemployment (between contracts) more often than I've been working. I have no benefits as a contractor, no retirement, no insurance, and little money to show for it.
I've been lied to about contract length more than once, told it's 1 year and end up looking again 3 to 6 months after starting. Promised there's a renewal after 6 months to be told they can't renew for this or that reason etc.
If you can get and hold onto a regular full time job, do so, I wish the IT industry and desktop support still hired regular instead of contract, but the way the industry is lately, it's not happening.
As for taxes, if you do take a contract, make sure it's W-2 and not 1099, that way they'll take withholding and unemployment out like any normal employee. If the contract ends, you can collect unemployment. On 1099, you're 100% responsible for your own taxes, withholding, etc, you're a self employed independant and cannot get the benefit of unemployment insurance.
Most contracts do not supply benefits, some agencies will, it's rare at best. Expect that if you need insurance, you're on your own.
Good luck with your future.
For a company I would think that it makes sense. Where I work we continually hire VERY bad employees. Getting them through the system, getting them acclimated, only to find something very wrong, then going through the process of getting rid of them is a huge burden on the company. Now of course this is all because of the idiots in management who hire these people, but what do I know?
Seems to me that if I contract someone and they prove that they would make a decent employee, then by all means hire them. Think of it as a sort of test drive for people. I'm not saying that you're not right, but I can see why a company would do it.
There are several types of contracts, and the type of one you have can affect the answers to your questions.
A W2 Contract is the most common around here (Austin). I'm currently a W2 employee of my contracting agency, working on premesis for . My contract agency pays me every other week, withholds FICA and SSI, pays the other half of SSI (aka self-employment tax), and deals with getting their money from . I'm paid by the hour, get no paid holidays, overtime, vacation or sick time. Any insurance or benefits would be offered by my agency, not by . Since Texas is a right-to-work state, there is 0 stability - they can let me go with no notice, and I can walk with no notice.
1099 Contractors are where pays you directly, does not do any FICA or SSI withholding, and you end up liable for the other half of SSI (which the IRS will label self-employment tax on your 1040). You might run into some things like net-30 terms where it can be up to 2 months before you receive your 1st paycheck, and, if it's a small company with money problems, you might end up getting stiffed or run around on the check.
There's also a corp-to-corp contract where you incorporate yourself and do business that way. I've never encountered this type of contract, and recommend you talk with an accountant before considering this.
As far as insurance goes, if your wife works, get insurance through her. For 1 thing, your insurance can stay the same if/when you bounce around from contract to contract. For another thing, her insurance is likely to be better and cheaper than what you'll find on your own.
For a W2 contract, I'd ask for at least a 30% bump (50% if you can get it) from what they were considering for a full-time position. This allows you to be ill, take some vacation, and weather times like Christmas when the company shuts down for a week and you don't get paid. The instability is also easier to stomach if you're making more money.
Add at least 10% more for a 1099 to make up for self-employment tax. More if the terms are net-30 or worse.
Keep some (at least 2 month's expenses) cash in the bank in case you suddenly find yourself unemployed - remember that companies like contractors because we're so disposable when the quarterly numbers don't look so good.
Good luck
One of these days I'm moving to Theory - everything works there
Telephone interview from 10 miles away???
'Just do it' doesn't have to be a blind decision. If they're only 10 miles from home, talk to the hiring manager about coming on site for a few hours.
You'll want to meet the people you'll be working with, maybe go for lunch, talk about what work is like, find out if contracting is the norm, etc. Get any promises of actions, benefits, etc. in writing-especially things like 3 day weeks. That should be in a contract, reviewed by YOUR lawyer, and include things like rate increases or other compensation for extra hours past 3 days (if that's what they're promising).
You should also try to have an offline, unofficial conversation later with some of the non-PHBs that you meet in a site visit.
You may also already know someone who knows someone who works there through local user groups, former colleagues, etc. who would be open to a chat.
Also consider your options - are you already gainfully employed, will this advance your career in a way you're interested in, what other options do you have for job, etc.
Being a succesful contractor is a lot of hard work and can be very expensive, particularly in your first year. If you're serious about going down this path, seriously think about the following:
1. Incorporate yourself into a company
The last thing you want is employeers/customers coming after your and your families personal assets
2. Insurance
Many companies require Professional Indemnity & Public Liability insurance. For the young & inexpirienced, this can be very expensive - recent PI insurance for us was more than $6000.
3. Training
Once you're a contractor, you are generally responsible for paying all your own (re)training costs. In the short term this mightn't be an issue but it is something that should be considered nonetheless
4. Working Harder
You will work harder as a contractor. Seriously. Because contract rates are more expensive and generally because you work on specific tasks (ie write system X), you MUST show a positive return on investment.
5. No real job security
Everytime you a contract finishes it's like a job interview all over again - sometimes you could go without another contract that suits your skills/needs for extended periods. which leads me to this point...
6. CASH FLOW
If you ignore everything else in this message, at least take note of this: You may not have a regular income. Cashflow management is essential.
You need to make sure that you've got at least 1 months salary set asside in the bank for times between projects, times when your payments are late because you submitted timesheet too late/nobody authorized your payment, etc. IT HAPPENS. Don't get caught short.
As somebody who has been a full time employee (FTE), a contract employee and an employeer (plug: http://www.pstcompactor.com/ ) I can honestly say that being a FTE provides the greatest of securities... it is easier to let contractors go than FTE's.
Hope you find some wisdom in my ramblings.
I've been contracting for the past 5 years as well. I've found it is better to be a contractor if you work for the right agency. Most agencies take between 25%-60% of your revenues for doing nothing but sending a bill out and writing you a check. Seriously take a look at PACE. P.A.C.E. stands for Professional Association of Contract Employees. PACE is a Virtual Corporate Back Office, Revenue & Expense Tracking, and the Best Benefits Package Available to ANY Contract Professional ANYWHERE in the USA. PACE also produces the contract employee's newsletter that has some valuable information for any contract employee. PACE bills the client for me and sends me the check. They do have a small 5% service fee, but it is well worth the benefits. PACE has also authored the The Contract Employee's Handbook. The handbook is a MUST read for anyone considering contracting. You might also check the PACE Agency Conversion Payroll Spreadsheet for more information. Be sure to tell them that Damon sent you ! --freak
It's no secret that lots of businesses like to unfairly take advantage of employees by calling them "independent contractors." I've worked for several bosses who have done just that.
The problem is that unless you're a principal or spend ridiculous amounts of money on work expenses, it's almost impossible to ever come up with enough dough to cover the 40% of your salary that you're going to lose in self-employment tax, let alone surpass the standard deduction.
The IRS has a pretty good outline of how to properly differentiate between employees and contractors (under the IRC) here.
Also, take a look at this PDF form from the IRS. It has the same series of questions, and can be filed with the IRS for a determination (even after the fact) if you should have been counted as an IC or employee for tax purposes. They can then demand that an employer pay the proper amount of your taxes, and give you a refund for what you've (improperly) paid.
There's a three year statute of limitations on filing the SS-8 form with the IRS, though, so just be aware. It's all on the 4th and 5th pages of the form.
Disclaimer: None of this is legal advice. Tax laws are weird and very fact-specific. If you need a solid answer, ask a qualified attorney or accountant or something. You could even ask Dave Barry. He has a blog.
I thought that once.
I was at a place where they "restructured". They decided they needed to keep the same ratio of full-time to contract employees. Since most employees were full-time, the majority of people who had to leave where permanent employees, because they wanted to keep flexibility for future "restructurings".
Use the rule of 1,000 A job paying 65k per year should pay $65 per hour as a contractor. See PACE and the contract employee's hanbook. --Damon
This is probably not going to be read by anyone because it's posted as anon-coward and thus modded as 0, but I thought I'd share my experience.
:-)
I quit my last corporate position in mid 2002, admist the worst economic turndown in recent memory. The job market was non-existent. Yet I quit one month after we had our first son. Why? I grew sick and tired of corporate BS, for one, but I guess I was also a bit cocky in estimating my ability to find fulltime employment when I wanted to. And I had enough money from stock to last us for a year or so.
So I've been doing this for 2 1/2 years. Had another baby since then. It has been rough for a bit, then became a little better, and now a lot better. There are several pointers to keep in mind:
- Hourly rate: you need to have the mindset that you should make DOUBLE the "per hour" rate you made when you were employed (just look at your paystud to figure out what that came to, or take your annual and divide by 2000 for a good estimate). This is for several reasons, including taxes, but also the fact that you must also make enough money to cover the times when you have no contracts. This should be your negotiation starting point, anyway. I ended up getting 10% under this number pretty regularly (I was making six figures before I quit, so its not like I was doubling 20$ an hour). There is another reason for this. When you negotiate as a contractor, if you price yourself too low, you either create suspicion (in the sense that you are obviously not good enough to charge a high rate) or make yourself expendable.
- Health Insurance: yes, you pay for it yourself. Of course, if you have something serious - I have diabetes - this won't work. The way you handle that is either by LLCing yourself and your wife, and getting small group insurance, or getting a contract that pays very little but gives you access to a group plan. Its workable.
- Liability insurance - ah. Everyone will tell you you need it. Im not so sure, not if you are the sole proprietor. Sure, if you get sued you're liable and everything is up for grabs, but honestly, remember you are dealing with people who are working with YOU, not a company you represent. I am highly doubtful that you will find someone who will be so hardcore as to be happy to throw you out of your house and leave you and your family on the street just so his company's coffers add a couple hundred K. Its all about relationships. Of course, if you screw up in a serious manner - criminal - then all bets are off, but no insurance will help you then.
- EVERYTHING is deductible. Your meals. Your miles. Your electornic purchases. Everything. Its ridiculous as to how many taxes you end up paying - 15% is not uncommon, and you can get as low as 12% or even 10%.
- The most important thing is that it TAKES TIMES to establish yourself as an independent contractor. Think a year. It takes patience, and persistance, and a lot of relationship building and nurturing. Find ways to increase your exposure, like performing speaking engagements for free (for groups like the IEEE, or IMC, or the american businesswoman's association, or what have you). On the other hand, I wouldn't bother with all those "networking groups" - I have yet to see a single contract gained from one of them.
But yes, its very workable, even with a family. And the ability to spend real, honest to god quality time with your kids is something that will payoff HUGE when they grow up. More than any "stable income" will do now. Retirement? Its over-rated, anyway
As someone who's been contracting for a while now, I think it's great.
/1.145 (self employment tax) - all actual benefits like health insurance. Generally if your own company pays for your health insurance in a situation like this, it's deductable but IANAL and IANATA.
You should calculate your income as your income
That assumes that the job is as stable as your other job (which isn't always a bad assumption, depending on your other job) If it's not, I'd use roughly the formula:
(new income from above - old income) * time before they fire you = contract severance.
You need to weigh this severance against what you current severance would be (usually a "normal" job gives you at least a couple weeks warning) and the variable probabilities of getting canned. I'd go with something in the couple months for a new job, and make sure you can afford it.
Of course, the time before they fire you is made up, and the math is really harsh if it happens quickly. If they're enticing you away from your current employer, get them to put in an early termination penalty equal to the amount you would've been paid if they kill it earlier than a year or something. This lets them not have to hire you "forever" but it gives you a reasonable amount of capital to survive them failing to come through.
Finally, up to its limit a Roth IRA (in diversified stock or an S&P500 index) is a better retirement vehicle than your 401k, unless the matching is extreme, the vestment significant, and the mutual fund choices not sucky - which is a lot of ifs. For more advice on how to save, I recommend the Motley Fool - www.fool.com But the broad principle is that your company MIGHT have been giving you a bunch of money, which would count as a benefit, above. But probably it wasn't huge and you're not massively worse off otherwise.
Looking for freelance Actionscript (Flash/Flex) or ColdFusion work and/or freelance developers. Email me, put Slashdot
Contracting is fine, but you need to address the differences. If you want some of the stability, you can write that into your contract, like minimum 1 year at minimum 250 8 hour days. Or you can do it by project. As far as compensation, figure at least 1.5-3X what you would expect in a standard salaried position. This is to cover lots of expenses, from tangible factors, like FICA (9%), health insurance (for the whole family! not cheap), retirement benefits, sick time and vacation time, etc, to less tangible factors like stability, title, overtime/exempt, etc. A typical "overhead" rate is 35% (the amount over and above the annual salary that institutions charge for FICA, benefits, etc). So it is easy to see where you need at least 1.5X your expected annual salary. 2X would be better. Point is, make sure this "we'll put you on a consulting basis for now", isn't a ploy to short change you. If you were expecting, e.g. $70,000/year, then you want at least $50-70/hour for 2000 hours/year (which works out to be $100-140K).
In the tech biz, who plans on working DECADES for anybody anymore??? You're lucky if the company is around for more than 10 years, without being bought or bankrupted.
I did a short-term (6 month) contracting gig when I first got married, as a means to bring in $$$ while looking for permanent work in my new home city (Indianapolis). Just because you land a contract position doesn't mean you have to stop the job hunt...
Stop by my site where I write about ERP systems & more
I've been contracting for the past two years and that formula worked for me. My difference was that I work through an angency so I file W2 for my taxes. In that situation my formula works because they pay for my payroll taxes.
Also there is something to beware in Washington State. There is a law here due to a lawsuit against microsoft that as a contractor you may only work for a company for one year then they must let you go by law.
If your contracting, keep track of your mileage. Check with your tax preparer, but you might be able to deduct it from your business income - no sense in paying self employment taxes on deductible items.
A fine is a tax you pay for doing wrong and a tax is a fine you pay for doing all right.
But the reason I'll be staying with PACE as long as I can find the work, is the benefits. The 401(k) plan is awesome. Every year, I max out my personal cap midway through the year (~10k USD), and on top of that PACE has an unbelievable company match, so good that I can get another 10k in as company match. They also provide insurance paid 100% from your division funds, and not with your after tax dollars.
Highly recommend going with PACE! If you don't say Damon sent you, then you can tell them Ryan sent you. ;)
--Ryan
I was contracting when it was good back in the 90's. I miss it. Not because of all that stuff above about 1099 vs W2, getting insurance (don't forget disability), etc., etc., etc. Not that it isn't Important. It is very important. Do the math and don't forget to budget time for vacation, sick time, Social Security, etc.
But here's what I loved about contracting: You get paid for when you are working and you don't get paid when your not:
Up against a deadline? They pay. You are there with all those full-timers getting there dinner on their own time. They pay you and you get the dinner too. I always used to tell my boss, if I'm here, and I'm not eating lunch, you are paying me.
But there's more: perfomance appraisal time is when they renew the contract, no BS. No BS company meetings, no six-sigma/Q+/pick-your-quality-program nonsense, no company gatherings on your time, they don't want you there and you (well, I) don't want to be there. I like doing my job, they can keep all that other crap.
You are there to do X and thats what you do. When X is done, and If they like you, they find Y for you to do. Its a good system.
That much said, here in the Boston area, rates still seem way down (but I haven't been looking all that hard either).
Finally, if you go through an agency, ask them what their mark-up is. Most will refuse but some do answer. If they refuse, I'll ask if its more than 35% (high typical on a W2). Most will answer that with a no but some will be lying. I have known agencies back in the day to mark up by as much as 65%. I doubt they can get away with that now. Its best to talk to someone that has worked with a particular agency to find out if they are good or bad.
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Yearly rate divided by 2000 gives roughly your hourly rate as a full time employee. So 80,000 a year is $40 an hour. As a contractor your hourly rate should be half as much again to 3 quarters as much again.
I worked in the recruiting industry for many years and that was the conversion rate I witnessed again and again. So in the above example your contracting rate would be between $60 and $70/hour
It's what I would measure my own contracting rate on.
If your going to use a K5 artical as the basis for your post you could at least link it.
Really, I know what I'm doing...Ohhhh, look at the shiny buttons!
Some currency manipulation, true. The Chinese Yuan should be allowed to float freely, for example. But mostly it's the massive deficits run by the US in the past 4 years. The USA is living beyond its means. Oh, and it was Bretton Woods, not Brenton Woods.
I am reading such a lack of understanding, experience and total misinformation when it comes to contracting that I couldn't resist posting. There's a lot of garbage, but some very good truth posted here. If you can't tell the difference, or take the time to research the differences, then you probably shouldn't be contracting.
I used to own a 15-person company that operated in the health insurance field. I am now an employee of one, working at home, and I'll be starting an MBA program shortly after the new year.
The one major benefit I can point out, and one that many business owners are unaware of comes down to health insurance. If nothing else, incorporating can save you a lot of money when it comes to health insurance. (By the way, there are many, MANY benefits to incorporating, and in this day and age, anyone operating a serious business as a sole proprietor should have his/her head examined.)
Contact any insurance broker you can find in the yellow pages. In the span of about 15 minutes, you should be able to channel through a few different brokers to find what you are looking for. You want an insurance broker that handles group benefit administration. This is the entity that can help you get health insurance.
The premium that I pay for my health insurance is pretty cheap. (Working in the health insurance industry, I know what to look for, so trust me, I have GOOD health insurance, not some crappy, no-name HMO plan with no coverage.) What I found out in my experience, and what many small business people don't know is that group health benefits can be setup to cover a single person (you), or two people (you and your wife, but from my experience, most of the time, it's cheaper to setup two different individual policies for each of you.)
Another interesting fact is that the premium you'll wind up paying (I pay around $285 for a top of the line, brand-name PPO plan with a tiny deductible, modest office co-pay, full pharmaceutical coverage, and 100% hospital coverage. Vision and dental are also included) won't change until your small business group benefit program reaches 25 - 50 employees, depending on the insurance carrier.
What does that mean? That your company of one pays the same as most companies with fewer than 25 employees, which constitute the majority of employers in the United States.
Once you find a good group benefit admninistrator, the vendor can also put you in touch with a payroll processing company (which I use, and which is great for cash flow management. Also, your payroll company assumes 100% of the liability for withholding payroll taxes. Trust me, the last thing you want to deal with is getting a letter 4 years from now telling you that you withheld too little and now owe the difference plus fines.)
A good administrator will also be able to put you in touch with a lot of the other insurance product you might need. A group administrator can also help you setup a variety of retirement accounts. (I saw one person point out that you can contribute more into a 401(k) retirement account than you can into other self-employment accounts. This is true, but you can combine different types of accounts (like the IRA accounts), and in a year or two, Congress will be enacting a whole new slew of retirement products. Additionally, VERY few people max out their retirement accounts.)
Like I said, there are a lot of resources out there that should allow you to filter the garbage from the truth, but the area of health insurance is kind of a black box.
If you (or any other Slashdotter) have any questions, contact me. I'm more than happy to help answer them.
By the way, it's about 12:30 in the morning, and I'm a bit fried at this point. (Sorry for all the () marks and rambling.) I don't know everything when it comes to healthcare, but unlike many of the backseat drivers on Slashdot, I've walked the walk. I'm self employed, incorporated, and my company has gone from 1 - 15 and back down to 1 person over the course of 3 years. I work in
i want to live life, not just go through the motions
Ask yourself what your hourly rate would be if you were paid hourly: not your current salary divided by 2080, but rather what hourly tech employees make at your place of employment.
Ask yourself how many hours of overtime you could realistically expect to get in an average week: not how many hours you work now, but rather how many hours management would actually authorize.
Ask yourself if pay difference is worth the free time.
There is a reason why $20,800/year employees are paid $10/hour, and why $83,200/year employees are not paid $40/hour - and it's not because salaried employees are free of cost.
Adherence to the truth is a form of disloyalty.
That tax rate is only perception. If (and I stress IF) you are paid via 1099, then you pay self employment tax which is at the 14% rate. But if you're a regular full time employee you already pay 7% and the other 7% is paid by your employer.
However, if you're paying the self employment tax, then you can take (yep - you guessed it) half of it as a deduction.
Now if you're incorporated as a C or S Corp, then you're in a different category. You're not using 1099s anymore; rather, you file a separate tax return for your company, as well as your individual return.
But there are pros to each. With an S-Corp you can funnel money to yourself as dividends and keep your salary (and corresponding tax bracket) rather low. With C-Corps you can take advantage of things like using company funds to cover medical bills and use that as a tax writeoff. Plenty of good books on the subject. Needless to say, you can do quite well on your taxes as a contractor IF you are smart about it.
The real reasons you want to ask for a lot more money as a contractor are that you aren't getting:
- retirement benefits
- medical coverage
- unemployment insurance
Anyhow sorry to bore you all with tax garbage but the parent's fearmongering was unwarranted. IANAL, just a small business owner.
Not to mention he accepts the morale problems that are associated with too much overtime work. What he needs to do is ensure he works you just hard enough so you don't get frustrated and move to another part of the company where things aren't as bad. If the team loses too many people, quality new hires will not join it. And over time, his own job security might be questioned.
As a "contractor" I am an independent businessman. I'm only one, but I am a corporation.
When I price myself, I take into account the following:
Of my 100% fee, I must subtract:
Direct compensation (salary)
Direct Benefits (10%)
Indirect Benefits (vacation/sick) (5%)
Downtime/Admin (15%)
Marketing (5%)
Insurance, business, all types (10%)
Other Expenses (10%)
Taxes (5%)
Profit (10%)
As you can see, my rate is 30% salary, 70% other expenses. In this scenereo, my breakeven point is about 100/30=333% of my salary. If a full time employee would be 60,000/yr, the hourly rate would be 60k/2087*3.33=$96/hr. Which, just so happens to be close to the $90/hr I actually bill.
QED, YMMV
Is it just my observation, or are there way too many stupid people in the world?
Although it is generally true that a C corp or a corporate-taxed LLC would allow you to pay some of your money as dividends, if you are the sole owner of a corporation, the IRS deems it an "insignificant entity". That means you might get the benefits of limited liability, group health insurance, and other corporate perks, but that the money it earns will be treated as self-employment income.
1099 work is not corp-corp, and most companies will not pay a corporation with one shareholder/employee, since that makes them somewhat liable for your tax evasion (they don't report checks to corporations to the IRS). Microsoft got busted with paying non-declared corp-corp consulting fees a couple of years back, and now there is a huge set of hoops one has to jump through to consult for them.
Talk to a CPA or tax attorney when you set up your payment structure, or just take 1099 work and be done with it. Remember, 1099's are declared to the IRS like W-2s, so you need to pay those taxes.
My account always says that the difference between tax evasion and tax avoidance is 3-9 months in Camp Fed.
Your car, your insurance, your retirement, your healthcare ( I strongly recomend Blue Cross/Blue Shield ), can all be written off. A good accountant will be able to help with this.
Since you are the only one owning the company, you want to keep your "salary" as low as possible (to cover what the company can't legally provide you with) that way you will pay lower taxes.
Again make friends with the local accountant. Pay him for tax consulting and doing the big parts of your books. He can probably even help you come up with a rate formula tailored to your business.
Next, for your retirement, since you arn't a finance guy and finding a good one is tough and expensive, just invest in a Wilkshire 5000 tracking fund, one with low fees and admin costs. This will gaurentee that you'll do better then almost everyone else out there and your performance will track with the economy; this will protect your money from inflation and let you appriciate some capital, early on you want to put as much money as you can into this because of compounding factors. Invest regularly reguardless of market conditions and put a fixed amount of money into your account at scheduled intervals. As you get older, you'll want to reduce your exposure to market risk (which is short term, but that doesn't help you if you die in the short term). Start to move your savings into government bonds and ladder them, this will provide you with a gaurenteed income stream for your retirement, but it will not provide you with appriciation and is still some what vulnerable to inflation. About 25% bonds once you hit your late 30s is a decent goal. By the time you retire, you want to have your bonds providing you with equal income to what you made as a contractor, so as you age, you'll want to move more and more money from stocks to bonds. You want to keep at least 25% in the market if you can though, not having stocks is more likely to cost you money then it is to save you money. Optimally, the bond interest income and stock dividends would cover your entire cost of living, allowing you to keep your principle and pass it on to your children.
The policy of the United States is worse than bad---it is insane. -- Ludwig von Mises, Economic Policy(1959)