Author Topic: Software Contracting  (Read 3441 times)

msilenus

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Software Contracting
« on: July 01, 2014, 05:32:42 PM »
Hi all,

I'm happy with my gig and arrangements, but DW is eyeballing the world of software contracting.  She currently works for a large company as a regular employee, and likes everything about it except the fact that they expect her to come in during the summer.  Her goal would be to keep things more or less the same, but loosen her connection to the company.  She's is very senior in her group, and does a lot of technical leadership and mentoring, as well as cross-team coordination.  Not a lot of what she does is actually hammering out code any more. 

Meanwhile, I'm eyeballing that situation and thinking about all the tax savings that could fall out of us being able to deduct the home office (neither of our employers requires us to have one, so we can't right now), and possibly get a solo 401(k) for more pretax contributions.

I'm curious if anyone here has any advice on making such a transition.  Some of my burning questions include: could she retain her current scope and responsibilities while going independent --how much latitude is there with the IRS on that?  She has so much freedom already, that the distinction they seem to be drawing between freedom of action and control of details doesn't seem meaningful to me.  She's not a people manager, but she's enough of a technical leader that she already gets to decide the details.  Also, what should she look out for in terms of setting a rate?  Can you do contracting that essentially makes you available to do work for them that covers broad duties like cross-team coordination, training, work scoping and planning?  Does the change in relationship limit what she can do for them, or just how much say they have over where, when, and how she does it?

Any such transition here would be a long way out, so for now, I'm mostly concerned with helping to figure out if it's a decent fit for her.  I'm also concerned with trying to make sure she's fairly compensated, and any rules of thumb in terms of salary <-> hourly relationships would be useful for that.

Very generally: any advice would be welcome.  This is totally alien to us.

gimp

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Re: Software Contracting
« Reply #1 on: July 01, 2014, 08:15:41 PM »
This is definitely a complicated situation and I don't know how much we can help...

Here's the crux of the issue. Your wife basically wants to become a contractor, and work less, while keeping her level of authority at the same company. It's possible but the company really won't like it, most likely, unless they want her to stay a fairly short amount of time to wrap up and then let her go. Why? Because it's gonna be a pain in the ass for them. Still, if she has the status to demand such a thing, they could do it.

Contractors / freelancers tend to take double their usual salary. They now have to pay their own employment taxes (both halves), medical, etc; and of course there's a lot less stability. That's the rule of thumb.

I highly recommend cutting down the variables. Don't look at this too much from a tax point of view (home office tax write-offs, etc); it's too damn complicated. Stick to the basics: Will her career suffer? Will her company allow this? What will her relationship with the company look like if she asks? If she gets it? If she is rejected? What's next in the plan? Is this a step towards retirement, or towards being an independent contractor / consultant?

msilenus

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Re: Software Contracting
« Reply #2 on: July 02, 2014, 12:04:59 AM »
I think you're isolating the right things to think about.  You're making me realize that I don't have a great sense of whether she sees this as a step towards retirement or not.  I suspect not.  She really likes her job, and her coworkers, and even the working arrangements.  I think she wants to stay for a long time.  She also wants summers off.  We need to figure out which she wants more.

I think she has a lot of power to dictate terms, but I do worry that she has a lot to lose if I'm wrong about that, so it's important to be more clear than I am about what her priorities are.

Thanks.

Frizhand

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Re: Software Contracting
« Reply #3 on: July 02, 2014, 08:50:49 AM »
I'm not a software consultant myself but I've worked with them my entire career.   It's a red flag to the IRS of someone goes from a W2 employee one day to a 1099 contractor the next.  Every company is a little different and some refuse to let W2 employees switch to 1099 consultant because it exposes them up to the possibility of an audit.

Setting aside money, taxes, etc,  I think 2 other things you need to know are 1) Most consultants are hired to do a specific job, complete a task, etc.  They aren't usually hired as leaders, mentors or managers.  So, if she wants to switch to a consulting role her leadership role might go away.   If she stays with her current employer she may be able to keep her leadership role but....

2)While she may have more flexibility with her work hours, does she plan to tell her boss that she won't be working all summer?  I doubt they will just let her disappear for 2 months in the middle of a project.  Many of the consultants I've known go into contracting with the same goal only to find that you need to take the work when it comes and you can't always make the schedule work in your favor.

I'm not saying it's impossible to have summers off, it's just not as easy as many people think.

Hope this helps.

JGB

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Re: Software Contracting
« Reply #4 on: July 02, 2014, 09:01:27 AM »
If she does make the switch, be wary about taking advantage of home-office tax breaks. Definitely rely on a certified accountant when determining what breaks to take.

I have been running a side-business from my home for the last 7 years. My accountant has dozens of stories about the IRS nitpicking the finer points of what it takes for some part of your house to be deducted as business use (e.g. taking a personal phone call in the room can disqualify the deduction). They do have a standard home-business deduction that you can claim while itemizing other expenses. It's a no-questions-asked type of thing, so we typically use that instead of the percentage-of-home calculations.

Also, keep detailed records of anything that is (or might be) a business expense.

NewStachian

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Re: Software Contracting
« Reply #5 on: July 02, 2014, 09:57:36 AM »
If she does make the switch, be wary about taking advantage of home-office tax breaks.

I know many people who work from home but don't claim a home office. I've talked to accountants who say it's one of the larger red flags to bring about an audit and isn't worth it. I'm certainly not saying don't do it, but be sure you look into it before you get blindsided by audits.

People are put into senior positions at companies because they are viewed as reliable and responsible. I can't think of any company who would keep someone around in that type of position who peaced out for 3 months a year. It just doesn't make much sense. I think it would be very feasible to stay technical and do that aspect, but would probably come with a step down from the high level of responsibility.

I've seen people successfully pull this off in the software field and some who got fired for bringing up the idea with their companies. I would be very careful testing the waters before hinting at anything.

Jack

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Re: Software Contracting
« Reply #6 on: July 03, 2014, 08:24:01 AM »
If the real goal is to have more time off in the summer... why not just negotiate for more vacation days? It seems like it would be an easier sell then to ask to become an independent contractor (without changing a bunch of other aspects of the job).

jsloan

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Re: Software Contracting
« Reply #7 on: July 03, 2014, 08:36:36 AM »
My wife and I have a side business that does consulting/programming for various small businesses and local dev shops.  My 2 cents:

On the accounting question: Our accountant always says that we need MORE deductions.  Since we communicate with clients via conference calls, no employees (my wife and I), almost never travel on-site to clients and have very little in the way of expenses due to equipment/purchases we actually don't have much else in the way of write-offs like you would with typical 'brick and mortar' type businesses.  We typically take all credits that are available to us and always end up taking a lot less write-offs then a typical 'brick and mortar' would.  We setup an LLC, pay taxes quarterly and pay my wife (president) a salary.  Being upfront about earnings and taxes goes a long way to avoid being audited.  We have have now had this system in place for the last 10 years without and audit (crosses fingers).       

On the consulting question: we typically only take on contracts where we can do the majority of the work remotely.  Since I still have a full-time job and my wife stays at home, she will travel to clients when needed, but we stipulate that the majority of any programming work is done off-site.  If a potential client doesn't like it, we choose not to take the work.  This is different situation than what your wife is proposing.  It sounds like your wife wants more flexibility in her current work place and is not necessarily looking to become a contractor because she wants to work for other clients. 

Typically I have seen that consultants who establish themselves as industry experts have no issues being in leadership roles while on contract.  Usually consultants like these are brought in to advise other higher level managers/developers about how a project should be run and be there to help with more difficult technical questions.  If she is needed, the employer will work around her demands as long as the work still gets done with the same amount of quality, within budget, etc.

Come things to consider: What I have found is that while consulting can be more flexible it can also be more demanding during shorter periods of time.  For example, if you have a project that lasts 6 months you may not be able to take the summer off because your go-live is Sept 1st.  On the other hand, after go-live you may not be needed again for another 6 months.  So the flexibility may happen outside of your personal schedule unless you have the ability to turn down work or have influence over a project timeline.  Also, you may be able to negotiate more flexibility if you are willing to lower your billing rate.

Lastly, if she is offered a contract, pay the money to have a lawyer look it over.  You want to make sure that all your negotiated demands are clearly outlined in the contract.  Even if you trust the person that you negotiated with there is always the possibility that they will not be there in 6 months and you will be working summers because it was not outlined in the contract (saying this from experience).