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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?"
What a timing! I'm recently thinking of moving from permanent employment to contract works, not that I don't enjoy my current income, but the inability to do something else in the quiet period (unlke Google which allows employees to work 1 day a week on their own hobby/project) is a killer. I'm a developer and all I want is to develop/create things, not sitting around waiting 3 months for PHB to approve a 8-week project.
I'm also thinking of my future income and lifestyle. Contractors seem to have more exposures to different industry/management styles, I hope to be more in-demand with such exposures, and through word-of-mouth, as long as you did good in the previous jobs, it shouldn't be too hard to find another contract. Your permanent employer probably wouldn't do word-of-mouth for you to many others.
And let's not be fooled into thinking you have a stable job by being "permanently" employed. You're only employed as permanently as the required notice period, 4 weeks maybe?
Rock that crushes, Paper & Scissors that don't matter.
Double your salary: $100,000 year salary is like $100/hour, even though the gross revenue from that would be $200,000 a year. There's just so much overhead, risk, paperwork, instability, etc.
I've been contracting for the last 5 years..
With the company I am presently with, for 2 years. They constantly dangle the "full time" carrot, but never deliver. I've found this with every place I have contracted, they talk the talk, but make excuses when its time to pay up on promises.
i hate pansy republicans
3 day work weeks and big pay were in the 90's dude.
I now interview people for full time positions that are way over qualified, will work for a fraction of what was being paid, and my inbox is full in 2 days after posting an opening.
As more work is sent away, the pools gets smaller from which to drink.
There's a number of different options for independent contractors as regards to retirements savings. You can actually save more than an employee as an independent contractor. You can put 25% of their income up to $41K / year into a retirement savings account.
The Google keywords are: independent contractor retirement savings.
In Soviet Russia, I ruled you
I switched to contracting 4 years ago and generally have not looked back. I do miss the lack of structured vacations. (they end up being between contracts with a slight level of uncertainty if I haven't prearranged the next contract before leaving). I am a pretty healthy person so sick days are not an issue and I've always covered life insurance from my own pocket to even supplement my employer. For health care... Living in Canada it's not a huge issue so I can't help you there.
All in all I would do it again and I recommend it.
Check out health savings accounts (www.hsainsider.com) for your healthcare needs. That may be a good option if you are making your own health insurance decisions.
Contracting can be great, as long as you know what to expect. I was a long-time employee at Sun when I left for a startup. The startup didn't work out for me so I went back Sun as a contractor. Even though I had been at Sun for something like 6 or 7 years, when I came back as a contractor I was the lowest of the low. I could not go to employee meetings, I did not participate in any of the extra cirrucular activities, I did not get any little tschotkies (SP?) at the end of a project. As long as that doesn't bug you, contracting is a good way to go.
Depends on the job. Most contracts I've taken have been short-term for almost that reason: if you don't work out, they want to be able to get rid of you.
If you're right for the job, then chances are the contract will be extended (depending on what kind of job it is). I've never had a contract that only lasted as long as the initial duration, and about half of them have lead to full time positions.
Dont be fooled into thinking that a non-contractor position is any safer than being a contractor.
The market is still brutal and there is no loyalty anymore between corporations and their employees. I would take the position in a heartbeat.
Good Luck!
On the other hand, your travel to & from the office becomes a tax deduction, along with many other legitimate business expenses that a "mere" employee incurs but can't use to reduce income taxes.
"He who throws mud, loses ground." - proverb
This isnt exactly true - you pay 1/2 of the self employment tax (the above mentioned percentage). Additionally, this tax is only applicable upto $87,900 - anything after that isnt taxed.
Something else to keep in mind as a contractor is if you are doing a 1099 or if the company will pay you corp-to-corp. Its roughly $100 to incorporate (at least in my state). There are also quite a few benefits if you do incorporate. Anything that you can justify as a business expense becomes a write-off.
One major advantage to incorporating is that your company is being hired, not you and there is a level of protection from being sued - you, as an andividual are not liable - they cant come after your house or car or bank account.
Also, any health insurance you pay for also becomes a write-off. I believe its 70% the first year and 100% every year after. Depending on if / how you incorporate, this can also be paid from your company.
There are many things to consider here and it can be quite beneficial, but you should do your homework and see if this makes sense for you. You will also want to get a good small business accountant - ie an accountant who deals primarily with small businesses and not individuals who will be able to better advise you.
2) Then, take out at least 10% for 'short term' savings (S) - in case you lose the job (something like a savings account would do.) If this acct ever gets over a couple thousand, move it to long-term savings.
3) Then, take out another 10-20% and set that side for retirement (R) in a long-term fund. I set it this high for several reasons: 1) you want to retire early, 2) inflation, 3) knowing the flukes of our economy and career choice, you'll likely need it sooner than later. This is also a practice of the Japanese culture (or was, 10 years ago), and it's been shown that the 'recommended' 10% that most Americans save has traditionally not been enough.
4) Now, figure what your annual health (etc.) costs (H) will be, and subtract it from what you have left.
5) This will leave you with the money you have for day to day annual living. Divide by 52 to figure out what your weekly available budget would be.
6) Figure out what you could get by on in order to pay rent/mortgage, food, utilities and a base level of entertainment (eating out, movies, video games) funds for the both of you. Subtract this living cost (L) from the total.
7) You should have at least 5% of your living costs left over at the end of the month.
So, in summary:
~/ssh slashdot.org ssh: connect to host slashdot.org port 22: too many beers
The only extra tax that a self employed individual needs to pay is "the other" half of social security.
15.3% of the first $87,600. As an employee you only have 1/2 of that taken out in withholding, and the employer pays the other half. Next year the limit is $90,000. In any event, the 2.9% medicare has no limit.
Note however, that you WILL pay your taxes quarterly (e.g. file 1040-ES) or you will be subject to penalties for not paying your taxes nice and early.
Now, that said, you may want to raise your hourly rate by a third or more to cover things like medical insurance, unpaid vacation time, time between jobs, etc.
Being self employed is no less stable than being an employee. Just ask anyone who has been downsized.
This issue is a bit more complicated than you think.
I did contracting all thru the late 90's. worked well for me, I got a $5 raise every 4 months. In Post 911, outside Silicon Valley they ask a bunch of questions about why you left so soon. Saying you were contracting doesn't cut it. In the valley you get funny looks if you didn't contract. They will think you don't have any initative or skill. If your boss worked in the valley it's cool but you have to take that into account. Hope that helps, likely it didn't.
Sorry about the writing. Robot fingers, you know? Cliff Steele in DOOM PATROL #23
I was a contractor at IBM with the carrot dangling. Not only did I get the full time job, but I made a killing in the process. It's not for everyone, weigh your choices, know the company you are working for and the company you are working at. Work hard, show them your stuff, if it's good enough you just might get it and if not, you are still contracting and can look for other work.
If you are working in the tech industry, I think you would be crazy to think that full-time employment means something more stable than contracting.
Thanks to the new overtime rules, you are more than likely to find yourself exempt from any kind of overtime pay on that salary. As the folks at EA how that's working out for them. Contracting is paid by the hour. I've never been paid overtime, but at least if I end up working a 12 hour day, I get paid for it.
California, as I suspect is the same elsewhere, is an "at-will" state. You can be fired at any time for any reason. There is no tech union so unless you are working for a government agency, if the company decides to get rid of you, poof. Contracting is theoretically unstable but you at least have some notice. If you contract is ending in a month, all you need to do is ask the company if they want to extend it or start shopping for another customer. If you contract for an agency, they take care of this for you. I've never worked for a company that didn't expand the scope of a project several times. Six month contracts end up being 18 month contracts...if you do good work, believe me they find places for you.
The dirty secret of contracting is that it's considered overhead, not employees. You get paid out of the same fund that pays for things like light and heat. So consequently, there's not a lot of attention paid to what gets spent, it's simply the cost of doing business. It's not uncommon to make twice as much per hour as a salaried equivalent. For specialize things like security, thin-client, servers you can make hourly rates that bring back visions of the dot-com days.
Health insurance is a biggie if you have no coverage right now. I was on my parents health insurance when I started contracting, and I switch over seamlessly to my own plan when that expired. I pay $170/mo for your basic HMO garbage, which isn't ideal, but I make enough to cover the cost. I got a Roth IRA way back when that I occasionally remember to pay into, but honestly...the only real way I've made any money is real estate. I bought a house that doubled in value in four years. Thank you California.
For stability, your best bet is to get work for a government agency. TSA, Post Office, I have many techie friends that moved to those jobs when the dot com bust happened and they haven't looked back...essentially they have jobs for life. Working for state governments is a more midgroup approach. You still have a pecking order (they don't fire, but they might layoff), but if you make it there a few years, again, employment for life. But full time? In this current pro-corporate climate? I don't think it's stable. You should expect to change jobs at least three or four times in your lifetime.
If that's what you are facing, the question remains, why not at least make the most while you can? Just don't be a spend-happy idiot consumer. Put lots away for a rainy day and keep your taxes in a separate bank account. As a contractor, you have to pay your own taxes and that's a pretty hefty chunk if you don't remember to "set aside" like withholding does. Again, agencies will often take care of this for you but you will be paying for it...if they pay you $30/hr you can bet they are billing more like $60/hr
Anyway, that's my thoughts. I started contracting, went through two failed dotcom companies, got fired from one full-time position (long story), got my business license, started contracting for myself, and haven't looked back.
- JoeShmoe
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-- I wonder which will go down in history as the bigger failure: the War on Drugs or the War on Filesharing
My company has been throught two rounds of layoffs now in the IT department. Permanent isn't so permanent anymore. Take the relative freedom you have now and go out on your own. They're willing to hire you up contracted, do it. Prove your worth. If they like you they'll either keep you contract or make your permanent. Either way it's as permanent as anything. Somebody said take your asking salary and add 1/3. I'd say more like 1/2 or even 2/3's again.
The contracting firm I worked for had basically doubled what I made just so they could offer up my bennies and pay my taxes. You're not supporting an entire corporation (just you) so 1/2 to 2/3rds is extremely reasonable. They're still on the cheap because they don't have to pay out all the benefits and taxes on your behalf, and if you suck (you don't, do you?!) they can let you go without too much worry or hassle.
Don't wait till you have kiddies at home, do this NOW!
First, there are three, not two kinds of hire. Employees, Contractors, and Consultants.
Contractors are like employees in that they are paid for time not results per se, and are direct reports to the company. Consultants do not do either (at least not real ones)
First, assume 40% goes to taxes. Bango.
Next, assume Healthcare costs are roughly 3 times what they are as an employee. Slammo.
Finally, understand you have no real rights and so can be terminated at will.
For that reason, Contractors on site for short duration (1 week to 3 months) tend to cost about twice the loaded salary of an employee. A "loaded" salary is about 1.5 * base pay. For longer term contracts, the pay is much closer to that of the employee because that's pretty much what you're doing.
Short term example: So a $50,000/year job cost the employer around $75,000 and should be paid for a contractor at about $150,000 per year.
Longer Term example: So a $50,000/year job cost the employer around $75,000 and should be paid for a contractor at about $100,000 per year.
The best thing about being a contractor, is you get a lot of experience by moving from company to company. The worst is that you never really know your job, have no security, and may be unemployed at any time. Vacation time is hard to get, and in some companies you're dirt.
Consulting is the best -- if you have the stomache for the ups and downs, are a REALLY self motivated person, and have communication skills that come close to matching your geek skills.
The problem with quotes on the internet, is that nobody bothers to check their veracity. -- Abraham Lincoln
I have only seen this mentioned once and it was buried, so I wanted to tack it on here because it was a wonderful point:
d =10905562
http://ask.slashdot.org/comments.pl?sid=130655&ci
Incorporate in Delaware.
However, that user did not explain a point that many people do not know: you can incorporate anywhere. Your business does not have to be located there. Delaware has lots of nice provisions for the startup corporation. If not there, do some investigation first, and don't necessarily incorporate where you are located.
Most business courses suggest that if you incorporate, you do so in Delaware.
Good luck!
*-*-*-*-*-*-*-*
"We are Linux. Resistance is measured in Ohms."
I worked as a contractor for 2and a half years after being enticed away from a FT position. OK the FT position I left was a dead end and I wasn't really going to move anywhere. And yes, the bigger the company the harder it is to really get the raises you think you deserve while you stay in position. But the contract I was offered doubled my pay, was hourly with overtime (base was over $75 an hour), had holidays, was temp-to-perm (permanent position was salary), had an available insurance plan that was only a $25 a week increase from what I was paying, and had a better work environment. After my second six month contract(in which I had negotiated a weeks paid vacation every six months) was drawing close to closing and a permanent position was not agreed to yet, I started looking for something else, and let that be known. The company offered an additional $10 an hour to a job I was already averaging 40 hours + 10 at time and a half + 2 weeks vacation/holidays. Of course I stayed. Within a year, the company went into a merger and permanent hires at that level were frozen. The manager who had been having me run my part of the department for him got promoted and inherited a work crew from the acquired company; albeit with less skills but an agreement to retain spelled out in the merger. The manager kept me month to month for another 6 months until I was the last contractor in IT and the top brass said pull the plug. The market had TOTALLY changed, and the only way to make that kind of money again was road work, short gigs with mad money. So I took a couple of months off, lived off savings, and looked locally. I finally found something, as my savings were hitting dangerously low, that paid about 3/4 of the contract job (without overtime) as salary. At the original position, they have lost three slots and increased workload. At the contract spot, of the 11 people in my department pre-merger (only 6 were worth keeping), 5 of those have left the department, with 4 leaving the company altogether.
So in retrospect, the contract was really no different than being permanently assigned, except you can bank more. You do have to get your requests out front and negotiate them. Hint...easy money...negotiate holidays in the contract then volunteer to work the "minor" ones as they come along, for perks or in my case time and a half (for a Thanksgiving I worked my boss also sprang for a $75 buffet at the Hilton!); you look like a hero to your boss, your co-workers thank you and you get capital! Your title usually looks better for a resume, your salary disclosure will look alot better, and often it's really the only way most IT professionals can be their own boss. YMMV
Comment removed based on user account deletion
P.A.C.E. http://www.pacepros.com/ will give you a W-2 so things like buying a house, and doing your taxes becomes much easier. Their fee is EXTREAMLY reasonable considering the services offere to contractors. They give you all the benefits of being a contractor, and an employee at the same time. Tell them Scott Skaife referred you....
Corporations are individual entities.
A corporation with one employee will shelter that employee from personal liability when working for the company. (Though I'd guess gross negligence where there was bodily harm, could be tough still.) That liability would go somewhere though, and that is to the corporation.
The problem with incorporating is you can't get money out as easily. The corporation then takes payment for your work, and has to pay you (the employee) accounting for taxes, etc. At the end of the year, you have to declare that as individual income (and get taxed accordingly.) Plus pay corporate taxes and paperwork overhead.
That's where the cake and eat it too thing is.
I've read stuff that talks about doing lots of stuff with corporations as far as buying assets (like your house) and then giving privileges to use the house to their employees (you.) In that case the house is subject to corporate liability, but less so to person liability.
Research incorporating thouroughly. It's expensive to start, expensive again to stop, and in order to be done properly has a fair amount of bookeeping overhead, and strict discipline with seperating personal and corporate finances.
My account advised me against it for the purposes of computer consulting.
all of the above are moot points if he is going to be working for a consulting firm.
I think being a W2 consultant is the best of both worlds, if you get benefits from your firm. It pays more than a direct hire position, you don't have to fool with the 1099 paperwork.
If you're greedy go for the full 1099 or corp to corp contracting.
A good friend of mine does essentially that - works for a consulting "body shop". You're absolutely correct in that you avoid the paperwork, costs etc but the downside is the $/hr you recieve is considerably lower.
It really just comes down to a a risk vs reward thing I guess.
Devil's Advocate: Ask yourself if you really want to work decades for a company that doesn't have a good screening system to keep out the incompetent.
Small potatoes make the steak look bigger.
I'm 32 and have been an IT contractor since 1993 and only deal with direct clients NO AGENCIES -- so I think I could lend some much needed insight to this post.
Here's my 10 commandments:
Thou shalt LEARN TO SPEAK ENGLISH!!!!
Time and time again, I get the contract over those from India and even other Americans BECAUSE I CAN TALK TO A CTO/CEO/VP/Director in PLAIN ENGLISH and not mumble, talk in lingo/jargon and not act impersonally.
Thou shalt not do a personal website if you have 1+ yrs experience -- be it a wedding site, a blog, a mom and pop shop or joe shmoe trying to setup an "Enterprise Application". These "people" are DEMONS and will fight tooth and nail and try to bleed bleeed bleed every last detail ESPECIALLY if you are doing them a "favor".
You shalt give your client nothing more than due in your most rightous and holy contract. Face it: if the money comes from some one's personal bank account, YOU DO NOT WANT THIS MONEY. these people will fight tooth and nail about parting with it, no matter how "nice" they seem.
Thou shalt not work for less than 2x the amount you can get as a fulltime employee with salary+benefits including medical with dental and atleast a 2 week per year vacation package. To do less is cutting yourself short. As a contractor you pay your own medical insurance (mines 260 a month for a PPO), you have no employment insurance (no work means no money, don't bother trying to collect unemployment -- unless you've been paying your own UE insurance), what about your retirement? You better account for PUTTING MONEY AWAY in savings.
Any contract over 1 month REQUIRES SUB-CONTRACTORS!
Face it, no one man can be king of all things, nor should you want to be. If you are a contractor, the end all and be all goal should be delivering what you promised ON TIME and ON BUDGET. So this requires that you adhere to the previous commandments and calculate ATLEAST your rate+20% as a lesser skilled subcontractor cost UPFRONT. If your subcontractors are SPECIALISTS, you shalt pay them your at least your rate and tack on 20% to cover thine ass.
Thou shalt write off EVERYTHING that has any silicon inside it.
A 42" Plasma TV is a "presentation device" a 40G iPod is a "data transfer device", a dvd read/write/player is a media transfer device. Thusly it is devinely mandated that your home entertainment system is a tax write off. Just provide hook-ups to your devices.
Thou shalt NOT host for free. You are a developer NOT in ISP. if your client needs permanant hosting, charge them for your service of procuring a list of acceptable hosting/colocation services if they require it. DO NOT offer permanant hosting or support -- you are a developer and developers religiously beta new services/features in order to develop for the upcoming language/software specs -- YOU ARE NOT AN ISP unless you have 5+ servers and can offer 24/7 tech support without a fee and still sleep and eat.
Thou Shalt not price compete. Bottom dollar developers are just that. Customers that tell you that your rates don't match up with a newbie are not clients you want in the first place. NO MATTER HOW BROKE YOU ARE. Remember -- clients come in packs. one pr two of the pack will be ones you want, the others can eat tripe.
Thou shalt not hop projects. You take a project, you finish it.
Bottom line: keep your promises. If the client can not fulfill the needs of the project or breaches the terms of the project and no remedy can be agreed apon: SUE THEM. Do not take a hit because the client hurts the project, charge them and let them know about it before you do. Extra work or delays in the project are BILLABLE. Remember -- you are a service provider and you do not have to accept any harm from your client in regards to profits.
Thou shalt collect money UPFRONT! At the bare minimum you shall invoice all flat rate projects at 33% at project start -- 33% upon an agreed mid-development milestone -- 33%+REMAINDER upon completion. Smart and more skilled negotiations will get you 50% AT START -- 25% at mid and 25% upon completion.
And while you are seen as overhead, as a salaried employee, I am seen as "free" labor. I was having a conversation with a director the other day, who happens to be my boss. I was trying to get across to him the concept of planning, and how there are 4 things:
Cost
Functionality
Schedule
Quality
You can Optimize one, Constrain one, and you have to accept the other two. I was using a current example, where we were constrained by schedule but wanted to get the most functionality in the release. Therefore, we had to accept the cost and the quality. His response? "Cost doesn't factor into this, because as a salaried employee, your cost is free. You can just work overtime and you don't cost any more. Problem solved."
That is how salaried employees are treated.
My beliefs do not require that you agree with them.
You've gotten a tremendous amount of good advice from long-time contractors, and I'd advise you to take it to heart. Taxes, insurance, and retirement are things that you will have to do on your own, and that's a substantial burden.
On the other hand, you're young and have no kids. This is a time for experimentation. If you are really hot shit, then you will thrive as a contractor. If you were working for some big company, you'd never be appreciated (read: compensated) for that, most likely. As a contractor, you can really see what you can do, in your most ideal work environment.
If it doesn't work out, oh well. You can try to get a more stable job somewhere else. Note well those that have said in previous comments that the idea of a "stable job" is almost as extinct as the dodo and passenger pigeon.
I own a small visual effects company, and pay my contract employees more than I take home myself -- and happily do it! No kidding, it's the way of the future, and can work out well for all concerned.
Thad Beier
I love Mondays. On a Monday, anything is possible.
I'm not sure I'd want promoted in a company that treats current employees exactly the same as outsiders when a job needs filled.
Just then the floating disembodied head of Colonel Sanders started yelling Everything You Know Is Wrong!-Weird Al
You should carefully weigh what you feel. Do you have a natural drive or are you more interested in things outside your sphere of work? If you have the need to charge forward and can self-motivate then, assuming you have decent social skills, you could probably make yourself a better living as a contractor. As for your questions about health and retirement I would suggest you check with a local expert. Perhaps your bank or your lawyer could point you in the right direction. That direction, of course, is a decent accountant (similar to a geek but it doesn't count in binary, it counts in $).
What is important to remember is that you really will need to have good social skills, I have seen so many "coders" try to go independant and fail because they think that they can just "geek" their way through.. uh uh uh... nope, wear that suit and articulate properly, yes, go for aftershave! As an independant, YOU are the executive and you must look the part. I cannot stress this enough!!
Good luck and Go get 'em tiger!
-if at first you don't succeed, stay the heck away from paragliding.
Yes, he is right in that sense, but I was commenting more on how salaried employees are treated. Just because he is right doesn't mean it isn't bullshit. Cause guess who WASN'T working OT when the team was?
When the quality isn't what they want, guess what? Work overtime to compensate. Note that they don't really believe in this matrix. They want to optimize everything. It just *does* *not* work like that. I understand that you have to find the right balance, and it is always a challenge. But you can't just close your eyes to these things. You cannot honestly believe that you will be able to do this stuff better than everyone else. If you don't plan these things realistically, you will fail. And the project I am talking about is a year off from the original estimates - but that's OK, because we now move the date about once a month, so when we finally "hit" our date someone will probably get a bonus. (but it won't be anyone who put in the OT)
Another part of "cost" that they don't get is that it isn't just money for salaried employees. There is a cost to making people work OT and not giving them raises. That cost is in morale. They haven't seen the real effects of this cost yet, but they will once the job market gets better. I get the feeling I am not the only person around here who is looking for other opportunities.
My beliefs do not require that you agree with them.
To clarify, you're actually not "just overhead"...which is actually a more costly option to a finance person than a contract worker. Overhead is the stuff the number crunchers try to reduce - rent [real estate], utilities, capital expenses [materials the company 'owns'], etc. This stuff can stay on the books for longer than the actual 'purchase' [or employment] of the item/person, which adds to the expense of running the business. If you were overhead, you would be more expensive to the company - insurance, severance and whatever other bennies are in there.
Contractors are more like a line-item expense...need to reduce it? Then let a few go next month. Have budget for a new project? Then add a few.
Who put this thing together? Me, that's who.