Author Topic: Independent Contracting  (Read 4760 times)

Mr. McGibblets

  • 5 O'Clock Shadow
  • *
  • Posts: 64
  • Age: 29
  • Location: Arlington, VA
Independent Contracting
« on: July 27, 2015, 11:20:05 AM »
I am a consultant for an IT company. I generally like it here, but I cannot stand how the company makes more than twice what they're paying me at my bill rate. I wanted to ask for insight from those who have started independent contracting.

Questions that come to mind are:

1. How hard is it to find work/create a robust network? Did you have to go through headhunters? The one nice thing about working for a consulting firm is that even if you aren't staffed on a project, you still get paid.
2. Factoring in wages and benefits, does the higher hourly rate outweigh the cost of insurance, other benefits?
3. Probably most importantly, did the decision to become an independent contractor progress you in your FI goals?

forummm

  • Walrus Stache
  • *******
  • Posts: 7396
  • Senior Mustachian
Re: Independent Contracting
« Reply #1 on: July 27, 2015, 12:05:14 PM »
You'll have to pay self employment taxes (the 7.65% for SS + MC that your employer pays for you) on top of what you normally pay. But you can contribute extra to a solo 401k. You'll probably also spend a lot of time (unbillable) at first finding business for yourself.

protostache

  • Pencil Stache
  • ****
  • Posts: 896
Re: Independent Contracting
« Reply #2 on: July 27, 2015, 12:32:28 PM »
I switched from full-time salaried to independent consulting last September, primarily working on Rails applications but I dabble in Django, various devops projects, and I actually do a bit of business consulting.

Answers to your questions:

1. long before I switched I found a community of like-minded small business owners and tried to just be insanely helpful, solving people's problems as they came up (for free). This definitely wasn't a conscious plan, but it turns out most of my regular customers (including two retainer clients that together completely pay our bills) all come from that chat room. Basically, networking really does work, and the best way (for me, at least) to network is to just be insanely, incredibly helpful with no expectation of any particular gain, other than being friends and solving problems. I have never used a headhunter, but I can see how they could be useful for some markets or technologies.

2. Yes. This isn't really the best way to think about it, though. I think about it in terms of how much can I charge without giggling because the number is just too ridiculous to think about. Currently I charge $1,500 per day for short contracts and give discounts if someone wants to retain me on an ongoing basis. For example, my biggest client pays $5,000 every two weeks for approximately two days each week. I don't mind the discount because they pay on time, every time, and they're great to work with. Your starting bare-minimum, would-never-actually-quote-to-a-customer floor rate should be your costs * 2, and then scale up from there. You're going to end up paying double what you're used to for Social Security / Medicare (assuming you're in the US), plus you'll need to pay for your own insurance.

3. Sort of? I found MMM/FIRE just a few months ago, so I haven't really organized things around the idea yet, other than looking for ways to cut costs. I do know that it has let my wife and I lead the type of life we want right now. For example, she just recently dropped to part time so we can spend a day each week with her dad. We're effectively semi-ER without the FI part, which we're also working on (monthly savings rate ~30%). I started a Solo 401(k) (via http://www.mysolo401k.com) and have been contributing regularly, along with contributing to my wife's Roth.


waffle

  • Bristles
  • ***
  • Posts: 286
Re: Independent Contracting
« Reply #3 on: July 27, 2015, 12:34:15 PM »
The pros I see are that you will keep the whole profit margin that your company currently makes off of you.

The downside I see is that you will have to do a lot more leg work to get and maintain your clients and take care of your administrative things like taxes and insurance. Depending on how much time that takes and if it has an impact on how many billable hours you can do might make it more of a hassle than its worth and lower your net hourly wage to a similar point of where you are now.

Axecleaver

  • Magnum Stache
  • ******
  • Posts: 3366
  • Location: New York
Re: Independent Contracting
« Reply #4 on: July 27, 2015, 12:52:38 PM »
Are you handling the sales side for your company in addition to the delivery? Managing your sales pipeline is the toughest part of making the switch. It's important to have work queued up or reliable, long-term clients. The best thing you can do is to find a project that is part-time but regular, similar to what protostache has put together. Bank most of what you make so you can endure the periods of no work. You probably signed a non-compete agreement, so be careful in making the transition that you aren't stealing existing clients. Those usually are time-limited to 1 or 2 years.

I have done this twice in my life, once in my 20s (I made a lot of mistakes) and again two years ago, older and wiser. I stopped practicing when my daughter was born so I could stop travelling so much, moved across the country and went to work for a .com company with dreams of stock options. Those didn't work out and I tried to relaunch my practice in the depths of the .bomb crash in 2001.

I was unemployed for 18 months and we burned through all of our savings while I tried to find work. I sold a few consulting deals but not enough to survive, until I went back to work for The Man in 2002 for half my former salary. Two years ago I relaunched my practice. The first year was tough, I worked really hard and made about 20% more than I did as a corp employee the year before. Then I sold a big piece of work that accelerated our FIRE plans to 2020.

I do still use headhunters, but I have found a few whom I trust and have built a long term relationship. These guys always tell me their bill rate and charge a reasonable amount. That service will cost you something. The guys I use know that I'll always take care of them and we don't sweat the small stuff. It will take time to build up this kind of trust, and many of the headhunters in the business are not honest dealers. I pay mine $10-20/hr depending on the duration. I also use them to staff my projects and I take a margin on making the sale. It's important as the contractor to understand how many middle men there are, I've seen deals with four companies taking a cut, and it's not creating a lot of value for the end client. These tend to be short term arrangements.

I also do my own sales and strategic partnerships, and these tend to be more profitable. I have built up a strong business network over the years and drew on this to help companies respond to RFP's. I did this for free in exchange for a piece of the work if we win. It helps them because they don't have the resources to respond to everything. This was how I got my latest deal which takes me through 2020, and after this work ends I will likely FIRE. I'm also exploring diversifying the work more (I have a lot of eggs in this one basket) and selling the business when I retire.

Some expenses you may not have considered:
liability insurance (errors and omissions)
if you hire employees, worker's comp
payroll service
health insurance (buy through your state's exchange)
technology (laptop, software, etc - lots of low cost cloud options now, though!)
training - may need occasional training to keep skills current. Example: PMP certification is wildly profitable but expensive to get on your own.
travel - most deals today are "all inclusive" so you have to build your travel into your rate. Bonus: move to where the work is and make out like a bandit, or travel cheaply.
accountant - I use one, some folks don't, taxes get a lot more complex
lawyer - contract writing and reviews

As an independent contractor, you'll pay both sides of the self employment taxes. And you get access to a lot of deductions you wouldn't normally have, like travel, 50% of meal/entertainment expense while travelling, cell phone, Sec 179 deductions for technology. You can also do a solo 401k and contribute 53k (2015) to retirement, with some restrictions.

As you can see, there's a lot of overhead to deal with, but it's a nice lifestyle. In my 20s I found that having inconsistent work helped us to save more. If you weren't sure how long the work would last, it was easier to say "we can't afford that." Good luck and feel free to PM me if you have launch questions.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 2973
  • Location: WDC
Re: Independent Contracting
« Reply #5 on: July 27, 2015, 01:07:12 PM »
Axecleaver has great comments.  Agree with all of it.

I would also ask whether you understand overhead rates and if you know what your current employer's overhead is.  (if you know your salary and you know the billing rate, then you know pretty much everything you need to know). 

I ask because the difference is not what your company "makes".  That difference goes into a "bank" that pays you (and others) when you're on the bench with no billable work.  It also pays the salary of all the people who work in the home office to support you (HR, management, admin, etc) and it pays for your fringe benefits and for your holidays and vacation days.  It's really important to work all of these into your new billing rate and then determine whether you really could do it cheaper. 

And as Axe said, it all boils down to whether or not you can get business.  If you can't then all the rest is moot.

Tetsuya Hondo

  • Pencil Stache
  • ****
  • Posts: 503
  • Location: 1960's Tokyo on the Bad Side of Town
Re: Independent Contracting
« Reply #6 on: July 27, 2015, 01:11:49 PM »
1. I was lucky enough to link up with a former employer that I now sub to. They keep me busy almost 100%. This has allowed me to build a resume of business quals that will help to get business on my own and I've now got a few things starting to bubble up. In my line of work there's a lot of other people I know doing similar things and we all help each other and can partner on opportunities, especially those that will require a team.
2. It's far and away better for me. My expenses are very low (occasional travel, paper, accountant fees). And yes, you have to pay both the employee and employer side of the medicare/social security taxes, but being able to pay yourself a "reasonable salary" and take the rest in dividends more than offsets it. You'll need to set yourself up as an S-Corp for taxes to do this.
3. Hells yes. I make more now and I can keep more of what I make.

worms

  • Bristles
  • ***
  • Posts: 368
Re: Independent Contracting
« Reply #7 on: July 27, 2015, 01:58:39 PM »
To compare employee versus contractor costs, I've always worked on the basis that an employee's daily contractor equivalent is 1% of their annual salary cost.  Very roughly all the unseen overheads double the employee annual cost and the average employee delivers the equivalent of 200 billable days.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 2973
  • Location: WDC
Re: Independent Contracting
« Reply #8 on: July 28, 2015, 05:33:12 AM »
To compare employee versus contractor costs, I've always worked on the basis that an employee's daily contractor equivalent is 1% of their annual salary cost.  Very roughly all the unseen overheads double the employee annual cost and the average employee delivers the equivalent of 200 billable days.
I think doubling it is cutting it too close. I'd come in somewhere between a factor of two and three.
200 billable days assumes the consultant is billable 100% of the time, minus a smallish vacation time. Unless you have gigs set up from now until eternity, you should build more into the overhead rate to pay yourself during the downtimes. Business doesn't always fall into the laps of the eager.

Personally, when I went solo, my client asked me to take a pay cut from what they had paid my previous employer because my expenses were lower. I debated it for a day and went back and asked if they were still satisfied with my work and whether they expected to be any less satisfied for the same work.   I declined to reduce the rate because the value I offered to the client was still the same.   In the end, I kept the rate the employer had billed and it has worked out great for me. Yeah, I could do it cheaper, but then that just shows that I don't value my own time as much.

Mr. McGibblets

  • 5 O'Clock Shadow
  • *
  • Posts: 64
  • Age: 29
  • Location: Arlington, VA
Re: Independent Contracting
« Reply #9 on: July 28, 2015, 07:50:48 AM »
Are you handling the sales side for your company in addition to the delivery? Managing your sales pipeline is the toughest part of making the switch. It's important to have work queued up or reliable, long-term clients. The best thing you can do is to find a project that is part-time but regular, similar to what protostache has put together. Bank most of what you make so you can endure the periods of no work. You probably signed a non-compete agreement, so be careful in making the transition that you aren't stealing existing clients. Those usually are time-limited to 1 or 2 years.

I have done this twice in my life, once in my 20s (I made a lot of mistakes) and again two years ago, older and wiser. I stopped practicing when my daughter was born so I could stop travelling so much, moved across the country and went to work for a .com company with dreams of stock options. Those didn't work out and I tried to relaunch my practice in the depths of the .bomb crash in 2001.

I was unemployed for 18 months and we burned through all of our savings while I tried to find work. I sold a few consulting deals but not enough to survive, until I went back to work for The Man in 2002 for half my former salary. Two years ago I relaunched my practice. The first year was tough, I worked really hard and made about 20% more than I did as a corp employee the year before. Then I sold a big piece of work that accelerated our FIRE plans to 2020.

I do still use headhunters, but I have found a few whom I trust and have built a long term relationship. These guys always tell me their bill rate and charge a reasonable amount. That service will cost you something. The guys I use know that I'll always take care of them and we don't sweat the small stuff. It will take time to build up this kind of trust, and many of the headhunters in the business are not honest dealers. I pay mine $10-20/hr depending on the duration. I also use them to staff my projects and I take a margin on making the sale. It's important as the contractor to understand how many middle men there are, I've seen deals with four companies taking a cut, and it's not creating a lot of value for the end client. These tend to be short term arrangements.

I also do my own sales and strategic partnerships, and these tend to be more profitable. I have built up a strong business network over the years and drew on this to help companies respond to RFP's. I did this for free in exchange for a piece of the work if we win. It helps them because they don't have the resources to respond to everything. This was how I got my latest deal which takes me through 2020, and after this work ends I will likely FIRE. I'm also exploring diversifying the work more (I have a lot of eggs in this one basket) and selling the business when I retire.

Some expenses you may not have considered:
liability insurance (errors and omissions)
if you hire employees, worker's comp
payroll service
health insurance (buy through your state's exchange)
technology (laptop, software, etc - lots of low cost cloud options now, though!)
training - may need occasional training to keep skills current. Example: PMP certification is wildly profitable but expensive to get on your own.
travel - most deals today are "all inclusive" so you have to build your travel into your rate. Bonus: move to where the work is and make out like a bandit, or travel cheaply.
accountant - I use one, some folks don't, taxes get a lot more complex
lawyer - contract writing and reviews

As an independent contractor, you'll pay both sides of the self employment taxes. And you get access to a lot of deductions you wouldn't normally have, like travel, 50% of meal/entertainment expense while travelling, cell phone, Sec 179 deductions for technology. You can also do a solo 401k and contribute 53k (2015) to retirement, with some restrictions.

As you can see, there's a lot of overhead to deal with, but it's a nice lifestyle. In my 20s I found that having inconsistent work helped us to save more. If you weren't sure how long the work would last, it was easier to say "we can't afford that." Good luck and feel free to PM me if you have launch questions.

Thank you all for your comments - they are very insightful. I know that I could handle all of the supplementary costs that come with creating your own contracting shop, whether it's outsourcing accounting or creating my own marketing plans. However, I don't know if I would be able to line up work for the foreseeable future without breaching a noncompete clause in my employer agreement. I like protostache's idea of offering free help until you earn the trust of a few clients. Like Axecleaver, I assist companies in drafting and responding to RFPs. I really enjoy this work - and my ultimate end goal would be to work virtually from anywhere in the world for a couple of clients at a time.

worms

  • Bristles
  • ***
  • Posts: 368
Re: Independent Contracting
« Reply #10 on: July 28, 2015, 12:33:25 PM »
To compare employee versus contractor costs, I've always worked on the basis that an employee's daily contractor equivalent is 1% of their annual salary cost.  Very roughly all the unseen overheads double the employee annual cost and the average employee delivers the equivalent of 200 billable days.
I think doubling it is cutting it too close. I'd come in somewhere between a factor of two and three.
200 billable days assumes the consultant is billable 100% of the time, minus a smallish vacation time. Unless you have gigs set up from now until eternity, you should build more into the overhead rate to pay yourself during the downtimes. Business doesn't always fall into the laps of the eager.

I think you are slightly misunderstanding me - I find that an employer can easily grasp that if their employee's salary is 45,000 then it is costing them 450 a day.  If I am pitching as a contractor and want 45,000 per annum, I only need to bill 100 days at 450/day to reach that salary.

In practice the situation is much more complex and in most organisations people have no clue what the true cost of an employee is.  Keeping it really simple is just to get people into the right ball-park.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 2973
  • Location: WDC
Re: Independent Contracting
« Reply #11 on: July 29, 2015, 06:55:01 PM »
I assist companies in drafting and responding to RFPs. I really enjoy this work - and my ultimate end goal would be to work virtually from anywhere in the world for a couple of clients at a time.
I would suggest leaving your current company and going to work for a (smallish) company that specializes in writing proposals.  You'll get to learn the small business side of things, and you'll meet people at companies that you'll eventually want to do business with.  When those people leave their companies, that's where your opportunity is.  My biggest opportunity was working on a very large government contract that was cancelled.  All the best people scattered to other companies and I had an immediate contact at over 20 great prospective companies. 

Mr. McGibblets

  • 5 O'Clock Shadow
  • *
  • Posts: 64
  • Age: 29
  • Location: Arlington, VA
Re: Independent Contracting
« Reply #12 on: July 31, 2015, 12:54:48 PM »
I assist companies in drafting and responding to RFPs. I really enjoy this work - and my ultimate end goal would be to work virtually from anywhere in the world for a couple of clients at a time.
I would suggest leaving your current company and going to work for a (smallish) company that specializes in writing proposals.  You'll get to learn the small business side of things, and you'll meet people at companies that you'll eventually want to do business with.  When those people leave their companies, that's where your opportunity is.  My biggest opportunity was working on a very large government contract that was cancelled.  All the best people scattered to other companies and I had an immediate contact at over 20 great prospective companies.

That's great insight. Is it fairly lucrative working for these boutique proposal shops in the DC area?

Axecleaver

  • Magnum Stache
  • ******
  • Posts: 3366
  • Location: New York
Re: Independent Contracting
« Reply #13 on: July 31, 2015, 02:10:47 PM »
There's a company in the Virginia/DC beltway area called Organizational Communications that does nothing but proposal development, and they will hire subs in to work on RFP's. I've talked them in the past but never pulled the trigger on a deal. Check out ociwins.com.

I recommend putting a resume together that articulates your wins and total dollar value. There was a guy I worked with who claimed $2.6b in proposal wins, which sounds pretty impressive, and he had a full list available to anybody who was interested. But most pros realize that ten year deals worth a billion dollars still only take a few weeks of proposal development and some good luck with the right team. OCI hires proposal managers and SMEs in addition to writers.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 2973
  • Location: WDC
Re: Independent Contracting
« Reply #14 on: August 02, 2015, 05:40:13 AM »
There's a company in the Virginia/DC beltway area called Organizational Communications that does nothing but proposal development, and they will hire subs in to work on RFP's. I've talked them in the past but never pulled the trigger on a deal. Check out ociwins.com.

I recommend putting a resume together that articulates your wins and total dollar value. There was a guy I worked with who claimed $2.6b in proposal wins, which sounds pretty impressive, and he had a full list available to anybody who was interested. But most pros realize that ten year deals worth a billion dollars still only take a few weeks of proposal development and some good luck with the right team. OCI hires proposal managers and SMEs in addition to writers.
Great advice. I've known a few other companies that specialize in writing proposals. Yes, I think they make good money, but not as good as when you step off into working for yourself. If you can get contract work now, that's great, and I would go for it, and I also would look for the smaller firms as an employee until you can build your own network.
Another company that specializes in proposals is SM&A. Lookup smawins.com.
The great thing about this skill is that if you can write the winning proposal and tie up with someone who knows contracts, you could chase the lucrative IDIQ/BPA contracts and have businesses knocking on your door. Great skill set! 

Mr. McGibblets

  • 5 O'Clock Shadow
  • *
  • Posts: 64
  • Age: 29
  • Location: Arlington, VA
Re: Independent Contracting
« Reply #15 on: August 03, 2015, 08:22:12 AM »
Great advice Axecleaver and Bluehouse. Thanks!

Lis

  • Pencil Stache
  • ****
  • Posts: 774
Re: Independent Contracting
« Reply #16 on: August 03, 2015, 01:01:00 PM »
My dad has been a contractor in the IT world for most of his working career. Lots of people have already given great advice and details that I'm not quite aware of, but I will pass on one tidbit of information that always bothered him.

As a contractor, you don't get many of the non-financial perks of being an employee. I'm not talking about healthcare or 401k, I'm talking about making lasting connections in the work place or even just general respect. As a contractor, you don't get invited to the company picnics, you don't get to join in in any of the social celebrations. As a contractor, you're expendable. Of course all employees are, and employees will come and go, but as a contractor you have an end date that's 'definite.' My dad, as a contractor, never feels as valued, respected, or appreciated as employees. I see the way my own office works with contractors and I don't think he's a unique case.

So if you're looking for pure financial pros and cons, feel free to ignore this post. I'm sure many posters here would shrug that off and not be bothered, but I don't think I'd be able to be a contractor, not at this stage in my life at least. I value the sense of unity with my coworkers, and I think that would be much more difficult to find as a contractor.

simplified

  • 5 O'Clock Shadow
  • *
  • Posts: 47
  • Location: SF bay area
Re: Independent Contracting
« Reply #17 on: August 03, 2015, 09:47:56 PM »
Thinking in terms of employee vs contractor is not very useful. Some employees can earn more money than some contractors and vice versa. The same can be said about all other aspects of a job, including benefits, perks, insurance, security, etc.

You should compare individual options at hand when you make decisions. It's not like if you take up a permanent position somewhere you are forever stuck with them. As soon as you find a better opportunity, you can move on, be it another permanent job or a consulting gig.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 2973
  • Location: WDC
Re: Independent Contracting
« Reply #18 on: August 05, 2015, 03:02:05 PM »
My dad has been a contractor in the IT world for most of his working career. Lots of people have already given great advice and details that I'm not quite aware of, but I will pass on one tidbit of information that always bothered him.

As a contractor, you don't get many of the non-financial perks of being an employee. I'm not talking about healthcare or 401k, I'm talking about making lasting connections in the work place or even just general respect. As a contractor, you don't get invited to the company picnics, you don't get to join in in any of the social celebrations. As a contractor, you're expendable. Of course all employees are, and employees will come and go, but as a contractor you have an end date that's 'definite.' My dad, as a contractor, never feels as valued, respected, or appreciated as employees. I see the way my own office works with contractors and I don't think he's a unique case.

So if you're looking for pure financial pros and cons, feel free to ignore this post. I'm sure many posters here would shrug that off and not be bothered, but I don't think I'd be able to be a contractor, not at this stage in my life at least. I value the sense of unity with my coworkers, and I think that would be much more difficult to find as a contractor.

Lis, I've felt that way as an employee too.  It all depends on the culture of the company.  My prime contractor at this time invites me to all of its social events.  I think the main difference for me, is now I don't take any of it personally and I don't care about the office politics, where as an employee, I used to let myself get worked up over silly things. 
And as simplified mentioned:  I can change any time I want back into a W-2