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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?"
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.
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.
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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.
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.
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.
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.
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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).
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