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To those of you who are/were self employed
Old 04-14-2006, 12:16 PM   #1
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To those of you who are/were self employed

So I've said before DW's last day is today, and she's a consultant come Monday, this way she can work part time, strictly from home, and take care of our daughter. I've gotten some good advice from y'all via PM on this, thanks!

But my question is, what is the appropriate hourly adjustement in pay when you go from salaried employee to consultant. I know your Social Security tax doubles, but searching the net has left me with more questions than answers. I think they kind of shafted her (her new hourly rate as a consultant is ~60% above her salaried rate), I've heard that 2x to 3x is the usual. We both thought it was not worth it to fight this one, since she's getting a good deal on the work from home, flexible etc., but if she takes on new clients, we want to find an appropriate target price.
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Re: To those of you who are/were self employed
Old 04-14-2006, 12:44 PM   #2
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Re: To those of you who are/were self employed

Laurence, she should charge what the market will bear. My DW has boosted her hourly rates three times in the last two years and change and has gotten nary a whisper of complaint. Naturally, I think this means she still isn't charging enough.

I'd start out at about 2X her former hourly equivalent, but if its possible to find out, I would also try to base it on what is typically charged for what she does.
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Re: To those of you who are/were self employed
Old 04-14-2006, 12:47 PM   #3
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Re: To those of you who are/were self employed

A 60% uplift isn't bad for an employer to an ex-employee. It is roughly the cost of burdens and benefits. Beware of talk about multiples of 2 and 3. That may be possible for an established, well-know consultant, but might be hard for a new one to get.

The answer you want, though, is what is the market value of a contractor--in your neighborhood, of course. (You don't want to know what the market value is across the country, only where you live.)

She could call a couple of local agencies and see what they would pay her. Add 40 to 60% and you have an idea what the market will bear. They might tell her what they would bill her out at, but probably not. This is a touchy subject.

Remember that agencies get the work for you through their contacts. They are in business, too, and are due a profit for a service.

A customer may insist that she work through an agency anyway, even if she found the work herself. This is very common, especially if she only can manage one customer at a time. It puts her at arms length and prevents the tax people from coming back and saying that she was not a contractor, she was really an employee. This is less of a problem with time as she establishes herself as a business and has a track record of other customers. Consider it a possible short-term necessity.

It might work to call any HR people she knows and ask them what their companies pay for contractors like her.

Remember, the first think a consultant (or contractor) needs is a customer. If possible, several, to spread out the risk. A sucessful friend told me the minimum number is six, but who can manage that?

She could start out at the +60% rate until she had more work than she could handle, then increase her billing rate on new work until customers ask if the rate is negotiable.

Consulting for a customer is not the same thing as working for them as an employee. A consultant or contractor has more to worry about.

Ed
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Re: To those of you who are/were self employed
Old 04-14-2006, 12:51 PM   #4
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Re: To those of you who are/were self employed

My bill out rate is currently 60% above what I made as a perm employee. My contract last year was 90% above. It depends on the client and the economy and the type of work.
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Re: To those of you who are/were self employed
Old 04-14-2006, 12:51 PM   #5
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Re: To those of you who are/were self employed

Very exciting, Lawrence!! *Hoping your wife succeeds beyond your & her wildest dreams!!

My thoughts:
One idea is to start an "S-corp" which is a passthru entiity - doesn't pay taxes but allows your wife's business income to be treated differently than "regular" sub-contractor type income. That ss & medicare tax adds up quickly. *The Corp "pays" the 7.65% contribution that is usually paid by an employer - this is a write off instead of income, thus, a tax break on paying your taxes! *(I can explain this more clearly if you need me to) There are also other write-offs that can go thru an S-corp more easily than thru an individual's tax return. * If you think this is the way to go (i.e., starting an S-corp), I really would recommend finding a good local accountant who works with small business/self-employed to give you guidance - money well spent in the long run. *BTW, we spent about $400 about 20!! * years ago to incorp, and our acct does our yrly returns, but doesn't charge for in between phone calls and quick visits to pick his brain. *I can't tell you how invaluable his services have been to us. *HUGE. * *
NOTE: Also note that having a deduction for a home office often brings up big red flags with the IRS. This is another "accountant" issue.

No matter what, you and your wife will never regret this move - being home with your child - PRICELESS!!! *

Good luck to you both!

Jane *

P.S. *Saw pic of Tori in her new glasses - She is SUCH a cutie!! *Enjoy, enjoy! *

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Re: To those of you who are/were self employed
Old 04-14-2006, 01:04 PM   #6
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Re: To those of you who are/were self employed

Theres the uptick due to paying your own benefits, and that sounds like what you're getting.

There are also two risk elements.

One is your wifes risk of immediate loss of income with no warning or severance. I know 'at-will' employees can be cut without too much trouble, but when the belt tightens, contractors often go first and with a cleaner conscience on behalf of the employer. If there is risk of her continued contracting being stopped or periodically deferred, then she should be compensated for that additional risk. If the odds of them cutting her loose are near zero, then so is this risk premium.

The other is the employers risk of losing your wifes unique skills as a result of underpayment or other distraction. If what she brings to the table is of importance to the employer, and the cost of losing that skill set to indifference or a higher paycheck, then the employer should be paying a risk premium. If she had been newly or nearly newly employed, her salary was probably marked to market to avoid this risk as an employee. If she had been there a while and hadnt gotten in-market raises (which happens a lot, and the longer the employment term, the worse it is), then there is probably a good sized dial to turn up.

In markets where a company brings contractors on and off with frequency, and the skill set involved is complex, a 2-3x multiplier may come to bear. In markets where companies keep contractors for a year or more and the skill set is easily replaceable from a broad pool...30-60% over standard salary to account for benefits and minor volatility is reasonable.

At one end of the spectrum, think someone who can develop Lotus Notes databases and applications for enormous legacy systems, and at the other end, a data entry clerk.
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Re: To those of you who are/were self employed
Old 04-14-2006, 01:19 PM   #7
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Re: To those of you who are/were self employed

Where I came from 2x hourly rate was common. They had policies limiting the increase to 75% ... but they were easily overcome by the hiring manager.

And these increased rates bearly covered the bennies you left behind.
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Re: To those of you who are/were self employed
Old 04-14-2006, 01:30 PM   #8
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Re: To those of you who are/were self employed

Being a small(er) company of about ~1000, they didn't have a lot of benefits, no 401k matching, no pension. She was already on my health care, so we'll see a net gain here. But your right, they know it's a sweet deal, and while she has a high level of skill and they love working with her, she isn't one of a kind/irreplaceable (except to me of course), so they knew they didn't have to offer the world to keep her around. It's a six month contract. We'll get our act together between now and the end, see if she wants to add an additional client or two, and renegotiate.
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Re: To those of you who are/were self employed
Old 04-14-2006, 02:08 PM   #9
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Re: To those of you who are/were self employed

Laurence,
Mrs. Sailor works from home part time as an hourly employee. She got about 15% more per hour than at full time salaried position, but the work is totally flexible now.
But we would even take per hour reduction in order to get to 100% work from home and less hours (although the company doesn't need to know this )

Keep in mind it's hard to find even 10 hours per week while dealing with a toddler full time (first hand experience as I "work from home" on Mondays)

Good luck to both of you,
sailor
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Re: To those of you who are/were self employed
Old 04-14-2006, 05:45 PM   #10
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Re: To those of you who are/were self employed

Quote:
Originally Posted by brewer12345
Laurence, she should charge what the market will bear.* My DW has boosted her hourly rates three times in the last two years and change and has gotten nary a whisper of complaint.*
Quote:
Originally Posted by Ed_The_Gypsy

The answer you want, though, is what is the market value of a contractor--in your neighborhood, of course. (You don't want to know what the market value is across the country, only where you live.)

She could call a couple of local agencies and see what they would pay her. Add 40 to 60% and you have an idea what the market will bear. .
Ed
L
Market value, market value--the above comments are ways to get to get at.* Value is driven by supply of competing talent available in your market and impact of the person doing the work.* The other variable is the duration of the relationship.* The rate of a short-term assignment, versus 6 month vs one year.
As your wife trys out the "consultant" role the next six month, see if it is a consultant role your wife wants to do or is it really contract employee?* The difference in my mind is key.
A consultant positions themselves to serve mulitple accounts and provides a range of services.* The contract employee is just that--a hired gun for the event.
As other advise, as a consultant you want to be constantly adjusting your fee to fit the situation.* I charge more to do activities that I do not enjoy with difficult clients (you try to avoid saying "no" to a client, you let pricing give the message.* Many time because the client trust you they will pay a bit more not to have to worry.* Every consultant should be striving to achieve "Trusted Advisor" status.* When you have that, fee rate is less of an issue (assuming responsible behavior on the part of the consultant.)
There are a number of good consultant books that you can review is it consultant role that is being pursued.* And I am sure that this forum has plenty of folks doing this gig as well
Good Luck
Nwsteve
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Re: To those of you who are/were self employed
Old 04-14-2006, 08:40 PM   #11
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Re: To those of you who are/were self employed

Laurence, I also forgot to mention something. Make sure you look into a solo 401k for your wife's business. We set one up for DW's business and it makes it very easy to shovel money into a tax deferred account. Fidelity made it very easy to set up and didn't charge us any fees.
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Re: To those of you who are/were self employed
Old 04-14-2006, 10:55 PM   #12
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Re: To those of you who are/were self employed

Thanks for the tip! We are first going to shovel the money on the home equity line to pay it off, but yes, the solo 401k is the logical next step.
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