Converting from salary to contract/consultant

[formerlydivorcedmom]

TLDR; If you convert from Salary to contract/consultant (w2), how do you calculate your desired hourly rate? 

I turned in my resignation, and this is my last week at my job. I love the company and the people but don't like half of my tasks.  With the pandemic stress, I started having panic attacks sitting down to do my work and I just can't anymore.

I work in IT and am the ONLY person in my company who does my job.  I originated this role and have been completely responsible for it for the last 4 years.  I also supervise 4 offshore contract developers whose skills are garbage.  I've recommended repeatedly that their contract be terminated.

My director doesn't want me to leave.  I tentatively agreed to do ad-hoc consulting for the next 8 weeks to fix things that go wrong while they figure out the strategy for the group.  There is then the possibility I could come back as a contractor working part-time to do only the part of the job I like (I could accomplish more in 20 hours than my 4 contractors do in their combined 160 hours per week...but they get paid peanuts).

Their initial offer was 95% of my current hourly rate (not taking into account benefits).  I countered at 150% of my current hourly rate.  They say their max is 125% of my hourly rate.  It would be W2, through a contracting firm.  I haven't seen the contracting firm's benefits, but judging from past experience, they are likely to be expensive garbage.

My husband is worried I might be unreasonable asking for this rate.  I'm frankly offended their offer was so low.  I *quit* and they think I'd continue to save them at a lower salary?  No, thank you.

[Fru-Gal]

Stick to your guns!

Frame this positively: You are now president of your consulting company. This is your rate; if they can't afford it, too bad. I also suggest you find some other clients. And maybe before all that, take a well-deserved break. You are obviously passionate about your work (or at least, you care) and they are exploiting that.

Also my advice from being a consultant is to negotiate a retainer + hours structure. If you are getting retainers from a few clients, that's like a salary. Plus -- I'm sure you know this -- your consulting rate should be WAY higher than your fully loaded employee rate. Remember they pay a large sum on top of your salary for your benefits, training, equipment, etc. All that is your responsibility as a consultant.

Final advice, major hack that should work in today's economy: UP FRONT 100% PAYMENT. This is amazing for project work. I did this for a few years before getting my job. In my case I found a sweet spot in terms of how much I could reliably get. You can look up scripts for how to ask for the money.

[Fru-Gal]

Oh I see you were asking what rate to charge. I suggest a few ways to figure it out:

1- Find some postings for contract work and extrapolate the rate.
2- Consider a day, week, month and year amount and work backwards from that.
3- Consider a project rate or retainer. This has the advantage of predictability for all concerned and is easier to invoice.
4- Remember to quantify the cost of the loss of your services and/or interruptions and share that as well

https://www.toptal.com/freelance/don-t-be-fooled-the-real-cost-of-employees-and-consultants

[trollwithamustache]

You are not at all out of line. Contracting rates should be higher. Note CONTRACTING.

So, how do you get from W-2 pay rate to billing rate by the sub contracting firm?

In California, the bare minimum multiplier is ~1.26 your w-2 salary to cover payroll taxes and your employers portion of social security ect. (sure you don't have to do payroll)

Add 0.12 to that for profit for your pimp. PTO and crappy insurance add to this.

1.76 multiplier was the barest bones I have ever seen from an engineering firm. YMMV

None of this matters if you are W-2, since the contracting firm's multiplier is always less than the companies. Otherwise why use them? I would assume a 1.8 multiplier.

Can you be a 1099 through the contracting firm? Thats a lot simpler.. you should demand 85% of the rate they charge.  And they should be charging minimum 1.8 x your old salary. 1099 is more appropriate for this short term kind of work and the write offs will almost certainly be worth it.

Also, this is a negotiation. Awkward Silence is good! If you ask too high, they will laugh and say no. If you ask too low they will say yes. Silence or" I will get back to you means" you asked for something on the high end of reasonable, but wasn't what they were expecting. As long as you stay reasonable and professional, (which you are with the 150% number). you hold the upper hand.

[dreadmoose]

It seems they're not used to having contract employees...

If their max is 125% would you be willing to work for that?

I personally work this same way (contracting through a firm) and started negotiations at 200% of my old hourly wage with the expectation that would go up. I'm now at about 3 times my old wage but 180% what my hourly should probably be.

You could work through the extra costs you have at their 125% max and see if it's worth it, but I would never accept lower to help a company out... you're not a charity, and if you were I'm sure it wouldn't be for a corporation's benefit.

I've attached what extra items I calculated back when I was negotiating in case there are any you haven't thought of, but this is in Canada so yours may be called something else.

 

[FI45RE]

FWIW, my SO went from W-2 to 1099 within the last year (although in a different field) and her hourly rate is double what her "hourly" rate was as a W-2 employee.

[formerlydivorcedmom]

They have a lot of contract IT, but none in my area of expertise.  That has long been a problem - they don't know how to value what I do.  My boss actually told me he based the second offer off of reviewing linkedin postings for intermediate/advanced work.  I politely told him that rate was perfectly in line for intermediate level with the technology, but I am an expert in both the technology and the company's implementation, data, and processing. 

The contract company is going to take whatever hourly rate I negotiate and add $10/hour to it for their overhead. 

I appreciate the validation that 1.5x the salary hourly rate is not unreasonable.  At this point I'm comfortable repeating "I'm sorry we couldn't reach an agreement" and then wait a month or so to see if they call me in panic because their new cheaper employee can't figure out what is going on.

Extra money would be nice, but I quit without expectations of having that income stream, so it isn't an actual loss.  Thank goodness for a 41% savings rate.

[Metalcat]

There's a little red flag for me, which is that I'm wondering how they can legally convert your position to a contract position if you will be doing the exact same work??

Where I live, employers can get nailed to the wall for doing something like that.

[formerlydivorcedmom]

I think this is okay because it would be on an as-needed basis.  I wouldn't be guaranteed any hours at all.

[trollwithamustache]

There's a little red flag for me, which is that I'm wondering how they can legally convert your position to a contract position if you will be doing the exact same work??

Where I live, employers can get nailed to the wall for doing something like that.

Since OP quit, and may or may not be coming back part time, the company isn't really converting her job.

[Metalcat]

There's a little red flag for me, which is that I'm wondering how they can legally convert your position to a contract position if you will be doing the exact same work??

Where I live, employers can get nailed to the wall for doing something like that.

Since OP quit, and may or may not be coming back part time, the company isn't really converting her job.

No, that's not what I meant. I meant that if I had a staff member quit, there's no way I could hire them back for the exact same role as a consultant, even if it was part time.

However, OP has already clarified that it will not just be part time, but as needed with no guaranteed hours. That makes it different. They're materially changing the role.

OP, ask for whatever rate you want. You've already quit, so hold out for whatever you can get. If you are that valuable, they'll pay.

[parkerk]

Yeah I would definitely hold out.  Offering less is insane.  I had to deal with nearly the same thing when I left my job but did a bit of short-term work for them right after leaving.  When I brought up rates my former manager was baffled that I'd charge more than my currently hourly rate.  He was like, "but your pay is only X?"  Not upset, but very confused.  I explained in small words about things like benefits and such that meant I was definitely costing the company more than X as a regular employee.  They didn't fight me on it but seriously, you are businesspeople.  You should understand how business works. 

As for how to calculate a fair rate, my city has a fairly good pay structure for their employees and all positions posted that are contract for them stipulate that the pay is 27% higher than non-contract in lieu of benefits, PTO, etc.  I just went with that because it was a small job and seemed fair enough.  However, different industries and areas have different standards.  I think you'd have to get some information on what's normal and fair locally for your job.  Don't have any specific suggestions for where to get that information though, sorry.  (But wouldn't it be great if you could find a resource that says comparable contractors actually charge 200% of your current pay?)

[ender]

For 1099, take your yearly cash comp and divide by 1000.

So if you make $100k, $100/hr.

This is a pretty good approximation until you hit about $150k/year and then it tapers off a bit because of benefits.

People consistently undersell their hourly rate in this equation because the:

1) don't do the math on benefits/time off
2) don't account for risk

W2 is slightly lower because you get paid some benefits but still, 125% is pretty silly. Especially since that's probably barely 100% by the time you account for time off and stuff like that.

If you have 4 weeks PTO, 2 weeks holidays, and a week of sick time a year currently, getting paid 125% of your salaried hourly rate is not that much more than what you were making before quitting.

Why would you quite a job and then work for less than you were making before?

In this situation I'd just say, "my hourly rate is at least $X/hour" and let them figure it out.

[gooki]

TLDR; If you convert from Salary to contract/consultant (w2), how do you calculate your desired hourly rate? 

Double it.

[use2betrix]

Do they have a contracting agency in mind they use? Are there a few to choose between?

I have worked as a contractor for many years and when negotiating pay rate I’ve had no issue getting the agency to send me their benefit package/costs up front.

You might be surprised, some agencies have good benefits. My last agency had a 4 or 5%? 401k match that was fully vested from day 1..

In regards to rate, unless you had some insane benefits (pension/bonus/profit sharing/etc.) then a 25% increase over your previously calculated actual rate would be a minimum. If you had some good perks that you’ll be losing, 150% could also be reasonable.

Sounds like you aren’t desperate - I’d certainly shoot for the stars. You may be surprised what some companies are willing to pay when desperate.

[trollwithamustache]

For 1099, take your yearly cash comp and divide by 1000.

So if you make $100k, $100/hr.

This is a pretty good approximation until you hit about $150k/year and then it tapers off a bit because of benefits.

People consistently undersell their hourly rate in this equation because the:

1) don't do the math on benefits/time off
2) don't account for risk

W2 is slightly lower because you get paid some benefits but still, 125% is pretty silly. Especially since that's probably barely 100% by the time you account for time off and stuff like that.

If you have 4 weeks PTO, 2 weeks holidays, and a week of sick time a year currently, getting paid 125% of your salaried hourly rate is not that much more than what you were making before quitting.

Why would you quite a job and then work for less than you were making before?

In this situation I'd just say, "my hourly rate is at least $X/hour" and let them figure it out.

I like this simple formula. Its worth noting Ender's statement that people don't do the math on benefits applies to the hiring manager too! I get told I am too expensive all the time by people who don't understand 1.) what their employees actually cost them, and 2.) when the job is done I go off your books and not onto idle time.

[Smokystache]

I wonder if it would be helpful to help them see the big picture. My previous employer (a non-profit) loved to send us annual letters with a full listing of all of our benefits with monetary amounts noted.

$XX,XXX   Annual Salary
  $X,XXX   Annual 403b matching
$X,XXX    Health Insurance premium paid on behalf of employee
  $X,XXX  Long-term disability insurance premium paid on behalf of employee
SS/Medicare, unemployment insurance, etc. etc.


This was their way of showing the full extent of our wages and benefits to justify why we didn't get a raise from 2010-2016. But this could be used to your advantage now. Create the same list for yourself to show them how much they have been paying you in salary + all other benefits you can attach a monetary figure to. Divide this number by 2,000 hours worked in a year to get your hourly rate inclusive of benefits.

Now set your hourly rate as a consultant. Show them the comparison of the hourly and also create an annual comparison (estimate how many hours per year they will need from you and multiply times your rate for an total annual cost to keep you on contract). Make it as clear as possible that you are actually saving them money (I assume) if they hired you as a consultant compared to them hiring a full-time replacement (to whom they will need to pay all the benefits). Gently remind them that with you, they will get someone who really knows the system/procedures and requires zero training, zero recruitment costs, etc. 

Sometimes I think that they forget how this works, so I try to make it was easy as possible for them to see the great deal that I'm giving them. Good luck!!

[formerlydivorcedmom]

You have all been really helpful! 

I have politely held firm on my rate (150% of salaried hourly rate) and declined to further justify it/argue it.  I have, when appropriate, gently brought up my view of what the job *ought* to be - which would leave room for part-time work for me doing the tasks I like.  Boss finally seems to have bought into that vision, just not sure how to get there.

Boss just told me to WFH tomorrow (my last day) and keep all my hardware.  He thinks his boss (who sets the rate) will come around, either when something breaks or when they get the first resumes and quotes from the (unnamed) contract firm and realize I'm not unreasonable.

If they do, great.  If not, I'll bring my stuff back in a few weeks and have a nice lunch with some of my friends.

[Smokystache]

How wonderful to be in a position where you can nicely, but firmly, say, "take it or leave it - I'm cool either way". I hope you'll update us on how it shakes out.