Consulting question

[68bucks]

I know many folks on this site do or did consulting in their retirement. I will be retiring shortly (about 10 weeks) and the notion of me hanging around in some sort of consulting capacity with my current employer is being floated around. I have a mild interest in doing this. I doubt that I would be out there drumming up additional business but not out of the question that one of our customers might request my help. It would be sporadic mainly for special project stuff and development work. So the question I have is how do I decide what to charge? So if you are doing this or have in the past, how did you determine your rates? Did you do it by the billable hour? What about travel? I would probably have some situations where I would have to travel for a couple nights. This would be all new to me so I'm looking for some ideas on what to offer/ suggest for compensation. I think I'm interested in doing this as much for possible tax advantages too but I have not fully explored what those might be beside the usual write off for home office and stuff like that. I also wonder if it is smart to form an LLC or something if that would offer more advantages. Any guidance is appreciated.

 

[Aerides]

DH looked into this briefly before ER. He spoke with the typical consultant recruiter that his MC uses for info. That would be easier than setting things up on his own, including negotiations and such. In his case it ended up there was less interest on his part once we ER'd (and no need) so despite a few initial potential things, nothing ever really came of it.

An LLC is also a good route if you wanted to go solo, ours is helpful for tax advantages on our healthcare now, and for a SEP-ira (i have a small business side gig,). With our small home business, we don't write off for home office or anything, because it's tricky and you need to show dedicated areas, not "i kinda use my spare bedroom office for work 30% of the time". Lots to explore on the Taxable events for small businesses (check IRS as those changed this year). A good local small business tax advisor might be worth a few hours to help you get started as well.

As far as hourly rate, I think a rule of thumb is twice whatever your salary was, adjusted hourly. At least, since you will be paying all the taxes, and no benefits. For travel you know the company per diems already, then it's just a matter of determining what hours are billable, or just factor that expectation into your regular rate if you think there's a lot of it.

I probably wouldn't go to a huge amount of bother until you are sure you are going to do it repeatedly - you may feel quite differently after you ER - but do the research on setting rates from the onset.

 

[Luck_Club]

+1 for double the hourly rate.
There is easily 50%+ costs above your paycheck amount that the employer must pay in taxes, insurance and benefits.

Also +1 on LLC or other company to receive payments under.
You may end up with no earnings being taxed after deductions and the 20% pass through.

 

[USGrant1962]

I've started a little consulting this year. My thoughts are:

• 2x your old base salary is a good starting point - I'm higher than that because I don't need to work for less.
• Most consulting contracts (in my industry) don't pay for travel time (another reason to have a relatively high rate). Actual expenses (or per diems) are reimbursed.
• I'm looking forward to deducting my COBRA premiums (and ACA next year) from my consulting income.
• You will be able to deduct business expenses (Aeron chair, new laptop, business cards, toner cartridges, etc.) from your consulting income on Schedule C.
• You will probably need to do quarterly estimated taxes.
• So far I have stuck with sole proprietorship, the tax man makes no distinction between SP and a single-member LLC. Theoretically an LLC provides some liability protection - I don't do work that generates liability (no design, nothing in the field, just management consulting).
• Companies seem to be getting stricter regarding co-employment issues. So you might want to make sure you have more than one client. I have one client that wants me to form an LLC and pay myself W-2 wages (through their payment processor). That is a non-starter under the tax code.

Good luck.

 

[68bucks]

Thanks for the feedback. Aerides has a good point about how motivated I will be to do this once I'm out of the day to day. I anticipate a huge drop in motivation. I have a tax guy that I will be meeting with soon to discuss a number of tax questions I have. I anticipate a high income in ER, especially in the first few years, so I'm looking for any tax advantages I can find. That's one reason for even considering this and why I thought about the LLC angle. That and the possibility of maybe deducting HC premiums. I have also been exploring other possible side gigs to accomplish the same thing. I won't be getting any subsidies I'm sure. I have space for a dedicated office if necessary and advantageous. I know there are a lot of pitfalls doing that. Someone had also mentioned the possibility of paying me a flat retainer for the year but there were no details how that might work. We are a small employee owned company and treat people well so I think I will be treated fairly. My biggest concern is really more focused on how much time I would have to commit to this rather than how much I can make on it. As I mentioned, tax advantages is as big of motivator to me as the money I can make. I don't need this income to RE. I want to make sure there is continuity going forward and that they do well after I'm gone. I hold a pretty good chunk of stock that they will be buying back for some time so I want them to do well. But it's not like the place will close up if I'm gone, I'm not that important. Thanks again.

 

[Bir48die]

My current is $125/hr at the low end.

 

[MissMolly]

I have been consulting for 8 years. My experience is exactly as USGrant1962 describes. I charge $125/hour. I work both remotely and on-site. If on-site I get airfare and a per diem (for food/hotel/rental car/gas/parking/tolls) in addition to the $125/hour. Actual travel time is not reimbursed.

 

[Aerides]

[*]I'm looking forward to deducting my COBRA premiums (and ACA next year) from my consulting income.

Non-Cobra HI - yes. COBRA - nope.

The COBRA premium is created under your old MC's name and plan, not yours/your LLC, so you can't deduct it as a business expense. For this reason, I'm using my HSA to fund COBRA, but will setup my exchange plan next year in my LLC. You can only deduct HI when buying it independent of cobra. You can deduct other OOP expenses, just not the premiums under cobra, iirc.

 

[Dd852]

I have a limited company that I do consultancy through, and it has been very useful to have it pick up legitimate expenses like travel and new computers. I’ve set my rate high to discourage boring people from tempting me with stupid projects! I retired at C level so I was paid more than I deserved. I take that rate, uplift by 50%, divide by the 220 days that very theoretically would represent the work year maximum I’d work and divide that by the six hours maximum per day I’d want to work. That gives a result that I then tweak further up or down depending on if I feel motivated actually to do the work! As a result, I don’t work much, but when I do it is very well rewarded. It all depends on whether you need to do some work or really want to do some work. The more you need it, the more realistic and reasonable you need to be. If you really don’t give a hoot, like me, aim high - be happy when you get turned down and be happy when you get an engagement. The same for travel time - if you really feel like doing the job or need to, wrap it in and make them feel like they aren’t being nickel or dimed. If you don’t care about the job, charge and charge again! The real key about this is you - is this a necessary part of your financial equation or is this a hobby?

 

[Crabby Mike]

I consulted off-and-on from ER in 2007 until giving it up for good at the end of 2016. I echo what others above have said -- my rate was around twice my salaried hourly, but I wish I'd started out higher, because once established for a client, it became difficult to increase more than a couple % each year. Other than the income, significant bennies were writeoff for health insurance (for myself and DW both); home office deduction (yes I did claim, as I had a home office/den, and it was my only place of business); regular computer, printer, etc. upgrades; and a 1/2 share of my cell phone and ISP bills. My tax CPA was surprised every year that I didn't come up with more expenses, but I was maybe not as greedy as I could have been.


My consulting income got us through some slightly lean times between a perhaps-too-early ER and SS and Medicare eligibility. I felt fortunate to have the option, which most don't.

 

[USGrant1962]

Non-Cobra HI - yes. COBRA - nope.

The COBRA premium is created under your old MC's name and plan, not yours/your LLC, so you can't deduct it as a business expense. For this reason, I'm using my HSA to fund COBRA, but will setup my exchange plan next year in my LLC. You can only deduct HI when buying it independent of cobra. You can deduct other OOP expenses, just not the premiums under cobra, iirc.

Hmm, I'll have to look into that. IRS Pub 535, Worksheet 6-A says you can't deduct:

Amounts for any month you were eligible to participate in a health plan subsidized by your or your spouse’s employer or the employer of either your dependent or your child who was under the age of 27 at the end of 2017.

My COBRA is not subsidized and I am named insured. Anyway, I made enough gross consulting income to cover the premiums so worst case I've paid for it with just a little consulting.

Thanks for the heads up.

 

[Aerides]

Their might be some ways to cover on the personal/schedule A side, but not as a small/self-employed business schedule afaik. I only did enough research to hit up against a few brick walls, then decided nbd since I have a carry over HSA saved, and am using that for now, and it's only for one year-ish.

But post cobra life it should come in handy. I'm glad I set things up and had a plan for a small side gig as it helps with a few deductions here and there.

 

[l2ridehd]

I had some very unique and highly specialized IT skills. I charged $5000 a day with a maximum of 12 hours a day plus expenses. I would only travel first class, but did not charge for travel time. I would usually only work 4 or 5 days at a time depending on the need and usually no more then 5 or 6 times a year, but had more requests then that. Last year I raised my rate to $7500 a day and they stopped calling. But that was the reason for raising my rate. I wanted to finally stop doing any more work.

 

[sunsnow]

You say you are only “mildly interested” in consulting, and don’t need the money for ER. I wonder whether you might be better off not bothering with this consulting side gig, which in my experience tends to bring with it lots of the things that were objectionable about the j*b.

+1 on the LLC idea if you do pursue this

 

[Stormy Kromer]

Don't forget the potential liabilities of being self employed. Many businesses will require independent contractors to provide proof of General & Professional Liability & Workers Compensation Insurance before hiring them. Check on the availability & cost.

 

[trumpeting_angel]

I spend about 5-10 hours per week working independently at the same sort of work I did in my j*b. I'm hired by attorneys (as an expert witness) instead of working for the courts. Most of the defendants are indigent, so the billing is limited to $180.00/hour. When I work on civil cases, I charge $250.00 - not just because I can, but because the work is much harder and stressful. I have a civil case coming to trial soon, and the stress of testifying in these sorts of trials always makes me vow not to take any more civil cases. I have more work than I am interested in doing. (The work in my j*b was all in criminal courts, and on the rare occasion it went to trial, it was a more familiar environment, familiar players, etc.)

I'm only semi-retired, and also work part-time up here (VT), at half the pay of my previous j*b. With an hour-long commute. Now that I'm Medicare-eligible, I'm tempted to leave the j*b and do the consulting, which is largely (not entirely) work-from-home.

 

[deserat]

I have a limited company that I do consultancy through, and it has been very useful to have it pick up legitimate expenses like travel and new computers. I’ve set my rate high to discourage boring people from tempting me with stupid projects! I retired at C level so I was paid more than I deserved. I take that rate, uplift by 50%, divide by the 220 days that very theoretically would represent the work year maximum I’d work and divide that by the six hours maximum per day I’d want to work. That gives a result that I then tweak further up or down depending on if I feel motivated actually to do the work! As a result, I don’t work much, but when I do it is very well rewarded. It all depends on whether you need to do some work or really want to do some work. The more you need it, the more realistic and reasonable you need to be. If you really don’t give a hoot, like me, aim high - be happy when you get turned down and be happy when you get an engagement. The same for travel time - if you really feel like doing the job or need to, wrap it in and make them feel like they aren’t being nickel or dimed. If you don’t care about the job, charge and charge again! The real key about this is you - is this a necessary part of your financial equation or is this a hobby?

I started consulting 10 years ago. The income from my consulting has fluctuated wildly, however, the benefits and frankly very interesting projects have kept me at it that long. I won't work for anyone as an employee again, or if I do, it will be for a very short duration.

I charge what the market will bear. If my client is a non-profit or has a set fee and I want to do the work, then my rates go down. If my client needs something quickly and/or they are for profit and I end up educating them such that they could do what I did for themselves if they actually listen to me and use the tools I develop, then they get charged more.

However, here's the crux. When you talk X per hour and then haggle over the hours, you are haggling over the overall price. I have slowly moved my business charging philosophy to a value based one, or a fixed fee arrangement. When a client contacts me, we discuss what they want and then I determine what I consider a fair price for the effort. I then spread out a monthly payment with a 25-30% retainer at the start and then do the work. I then manage my own hours and effort. I also make sure they have something tangible at the end: a report, a presentation, an algorithm, etc. My rates have run from $75/hr - $500/hr based on how much time I actually had to expend on the project. The average nowadays is $125-$200/hr if they insist on an hourly rate.

Travel is always paid by them and is merely a reimbursement. I will use their preferred airlines, hotels, rental car agencies, etc, as it is a good will gesture and makes it easier to justify the expenses if they are similar to what their employees have.

I am a registered LLC in one state and have an EIN. However, the US gubmint doesn't like that and has changed it such that a sole proprietor LLC is treated like a pass-through and they want my personal SSN. I still use the EIN when submitting my estimated taxes and when I pay any other checks at the end of the year for my business or Schedule C purposes.

I do use the home office deduction on my taxes, and I do have a home office (room that is an office). They've made it easy in the last few years by giving you the option to use their simple $600 or so deduction. I deduct half of my Wifi and phone charges as well. I've set up an SEP IRA and contribute to it religiously (although I am now trying to transfer as much to the Roth as possible). I deduct my healthcare and dental insurance through the 1040 on the front as a business expense.

I am fortunate that in my consulting niche I get paid for my thinking - my credentials and experience have given me this opportunity. I have a website, but I do not overtly market - I am sought out by my clients for the most part. I am fortunate to have an international clientèle, so that I travel to Europe on business and can expense that travel. I usually tack on a few more weeks for an extended vacation after my business meetings.

I met a person who owned his own business a few years ago and he had the best advice: declare *all* income, however, expense all that you can as well. I've never been audited and have usually been very close on my income tax estimates.

I am semi-retired and if I can I may consult for many years longer. I do it for the intellectual stimulation and challenge, not necessarily for the money. I do like the tax advantages it allows, though, such as being able to expense my 'newish' (refurbed) computers and phones as well as the travel.

In any case YMMV - by the way, I quoted this person's response to the OP because I agree with them and think it is valuable advice to the OP.