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Changing from payroll to consultant?
Old 05-17-2010, 10:56 AM   #1
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Changing from payroll to consultant?

This is in the "dream" thread for a reason

My wife and I each work for a mega corp. I am an engineer and she is an HR consultant for a megacorp (which sells her services for her).

My wife's fiscal year is closing and her revenue numbers just came out- she pulls in 480k+ for her company, and she makes a fraction of that. Over 10% of that revenue, but not by much IMO.

Early in her career she thought she might try being a consultant towards end of her career.

My questions are this- if you ever changed from being a regular employee to being a consultant (or a spouse/ SO did), what drove the change, and what factors would you consider for making the change?

Right now I carry the benefits, and we have twin 2 year olds.
Wife sets her own schedule (except for group meetings) and generally likes her job.
It is clear I will retire first- both of us are in mid 30's and I might retire 10 years before wife does.

I see dollar signs, she is clearly not ready to be a consultant now or even next year, but if she were to make the transition, what issues would we want to consider?

It's more of a hypothetical right now, just asking because I am bored at w*rk
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Old 05-17-2010, 11:05 AM   #2
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Laurence is about your age and has a spouse who transitioned from megacorp to consulting work. You might send him a PM and ask him to comment on this thread.
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Old 05-17-2010, 11:05 AM   #3
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I switched from full time employee at my last job to consultant. However, my switch was due to my resigning and they deciding not to replace my position but needing someone to fulfill some functions they could not move elsewhere. I was the accounting manager for two regions.

The money was good for what I did, however my life was made easy as there was no need for me to go searching for clients. However, I did find it changed the dynamics of how I interfaced with my former colleagues. People couldn't work out what I did and it caused a lot of confusion as to what I was doing there.

However, I did find it hard going in each day because I no longer felt connected to the organisation.
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Old 05-17-2010, 11:55 AM   #4
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If nothing else, your DW will probably get offered more money to stay on staff if she tells them she wants a change of status or is leaving to start her own company.
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Old 05-17-2010, 12:16 PM   #5
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I started my professional life working for a mega corp. Then, after a few years, switched to consulting (IT related) for about a dozen years. Now, I am back to being an employee for a very small firm.

For me, consulting was much more rewarding financially especially since I was paid by the hour for most gigs; and, there was always more work to do than hours in the day or hands to do the work. The outside consultant generally seems to have more access to executive management than most employees; so, consulting can also be more rewarding from the perspective of making things happen.

I know some people fear the lack of stability associated with being a consultant; but, on more than one occasion, I have remained at my mega corp desk on assignment during and after significant rounds of employee layoffs. In my opinion, your only real sources of job security are your skills and network.
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Old 05-17-2010, 12:21 PM   #6
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on the expectation side...if your wife pulls in $480k/yr and assuming 2000 hours/yr, that's $240/hr. Is that an accurate hourly rate for HR consultants?

if you're not already in the AMT, you most likely will be...
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Old 05-17-2010, 12:57 PM   #7
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on the expectation side...if your wife pulls in $480k/yr and assuming 2000 hours/yr, that's $240/hr. Is that an accurate hourly rate for HR consultants?
The Op said she brings in $480K+ "for her company." I take that to mean her work has brought $480K of billable hours *to her employer*, of which she would only get a fraction.

Obviously, there would be a temptation to keep all the hourly rate for yourself rather than only get a small chunk of it from Megacorp.

If someone can make a lot more consulting than with a salaries Megacorp position, it can make sense particularly if they have a spouse with a steady, secure income and health insurance benefits.

If the OP (presumably the one who would carry Megacorp health insurance if his wife became a contractor) would be retiring earlier, then the health insurance question at the time of his retirement would be my greatest concern. However, if this retirement is planned well before 2014, it will be possible to re-evaluate the health insurance situation based on the full implementation of the recent reforms. AMT is also a concern unless she scales back her hours.
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Old 05-17-2010, 01:34 PM   #8
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The Op said she brings in $480K+ "for her company." I take that to mean her work has brought $480K of billable hours *to her employer*, of which she would only get a fraction.
I understand this. My point is, either the OP's wife worked insane hours for the last fiscal year or I am missing something. I am skeptical that an HR consultant would fetch even half of that on their own or within a megacorp (unless it is internal billing), but I could be wrong as well.

The best way to understand what one would make as a consultant is to start at what other consultants are billing, then to understand what their costs are. Do they run their ticket through another company? Extra insurance (unemployment, liability)? Full SS payments? Tax Implications? Etc. Having your spouse carry health insurance is one thing that can help tip the scales...
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Old 05-17-2010, 01:58 PM   #9
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Originally Posted by ronocnikral View Post
on the expectation side...if your wife pulls in $480k/yr and assuming 2000 hours/yr, that's $240/hr. Is that an accurate hourly rate for HR consultants?

if you're not already in the AMT, you most likely will be...
Quote:
Originally Posted by ronocnikral View Post
I understand this. My point is, either the OP's wife worked insane hours for the last fiscal year or I am missing something. I am skeptical that an HR consultant would fetch even half of that on their own or within a megacorp (unless it is internal billing), but I could be wrong as well.

The best way to understand what one would make as a consultant is to start at what other consultants are billing, then to understand what their costs are. Do they run their ticket through another company? Extra insurance (unemployment, liability)? Full SS payments? Tax Implications? Etc. Having your spouse carry health insurance is one thing that can help tip the scales...

I am sure $240/hr is too high
I am also know megacorp does not bill her out by the hour... there is more to her billing than that (clients are billed per employee because her company processes something which is paid per employee). More employees=more work for my wife's megacorp.

As I begin to look into the numbers, I believe the 480k is her clients total value to her megacorp... and wife's value is a fraction of that. Thx for pointing out obvious and making me think about that.

Even if the 480k is only her organization's part of the billing, part of the service is a legal team which sits behind phones and answers HR and legal questions her clients have. Most of time my wife has the answer, but when in doubt she has a hotline she can call (or her clients can call) to get the advice, and that would justify the higher billing rate in this case.

Someone once told me anything less than $120/hr as a consultant for any industry is too low. But since I have never consulted, I don't know if that is fact or fiction.

My wife's company generally markets HR support to small and medium sized companies. Small could be a roofing, plumbing or privately owned retail store which might have 3 employees (so for these companies $240/hr is too steep and even $120/hr might be too much) or doctor's offices and similar with slightly higher employee counts.

My wife is only person in her group which does not have the "senior" before her job title, and she is expecting to have that conversation with her boss once the fiscal year closes at eom.

thx for replies, keep them coming
retirement would be 2024 at earliest for me, and probably 2029 at earliest for wife (both in mid 50's at that time).
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Old 05-19-2010, 02:48 PM   #10
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As a consultant, she will have overhead to deal with (office equipment and supplies, business owners insurance, and will probably want an E&O policy and E&O tail coverage for a period of time if she ever quits).

Self-employment tax is very aggravating, as well (I don't like writing checks for roughly 15% of my gross business income). Something to think about.
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Old 05-19-2010, 09:56 PM   #11
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Clarification- the $480k is my wife's revenue- its not shared by other organizations. I just realized now why their CEO sees her division as a profit driver.

The 15% self employment tax would not be on all the income, only the first 150k or so (right?) SS has a cap somewhere.
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Old 05-20-2010, 07:46 AM   #12
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There is a cap on Social Security but not on Medicare. I still think it's a brutal tax. It might be worth her while to establish an S-corporation to avoid some of it.
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Old 05-20-2010, 10:44 AM   #13
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She may want to explore HR consulting firms - there are a lot of them. We use one for our nonprofit and it has been very helpful.

They have all the bells and whistles - legal support and just plain good advice.

Consulting on her own, she'd be competing against all these firms. Even my lil nonprofit would choose a firm over an individual.

Other than that - I have many friends who jumped to consultant and it is a very cyclical gig. Hoping she has a base of clients to start out with, you are constantly in search of the next job, it may dry up in a bad economy (like now) and it is a very lone ranger type of existence.

I know consultants who find good ways to work around the problems above, but those are just a few things I've heard. You definitely have to charge a high rate to cover your own expenses including health care and all the time you spend dealing with your own admin type paperwork etc...
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Old 05-20-2010, 10:48 AM   #14
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She may want to explore HR consulting firms - there are a lot of them. We use one for our nonprofit and it has been very helpful.

They have all the bells and whistles - legal support and just plain good advice.

Consulting on her own, she'd be competing against all these firms. Even my lil nonprofit would choose a firm over an individual.

Other than that - I have many friends who jumped to consultant and it is a very cyclical gig. Hoping she has a base of clients to start out with, you are constantly in search of the next job, it may dry up in a bad economy (like now) and it is a very lone ranger type of existence.

I know consultants who find good ways to work around the problems above, but those are just a few things I've heard. You definitely have to charge a high rate to cover your own expenses including health care and all the time you spend dealing with your own admin type paperwork etc...
LOL my wife already works for one of the firms, I would say one of top 3 in her industry, maybe top 2.

thx for reply
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Old 05-20-2010, 05:27 PM   #15
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I jumped into consulting after 19 years in my industry. It has taken about 1.5 years to get going, but I like it....a lot. I pretty much work my own hours, I tend not to charge hourly but by project (Alan Weiss has a whole set of books and mentorship on that type of pricing). I do have to market - this year I will have done 4 public presentations and 3 private ones for my customers. I've also published three peer reviewed articles. I have a website (simple) and domain with email address. I do volunteer work on the boards of some professional organizations. I try not to travel too much.

The paperwork hasn't been as daunting as I initially thought. Yes, it's 15.3% for the OASDI and Medicare Tax....+ federal and state income tax if applicable. The quarterly filing is something you must keep up with. I use the accounting method which relies upon your actual receipts at the time. There are some laws regarding tax-deferrment for retirement that are more generous to self-employed personnel. And you can decide you don't wish to work with someone if it doesn't 'feel' right.

You quickly learn who is 'fishing' and who is a true viable customer. I've found that by being generous early on, you gain a customer's trust. It also helps as I'm not desperate to make an income, so I can grow or shrink the business as per my desire.

The reason I did this was I was moving to an area away from where I would have access to a job in the industry (although I would have had and still do opportunities in other industries), however, I wished to stay within this industry and use the experience and education I had. It has turned out to be a very good decision - I'll be honest, I was a bit worried at first, but I am much happier now. Yes, it can be a lone ranger existence, but being involved in the professional groups helps that. As for business cycles, they are there, but if you keep yourself on the speaking or publishing circuit, you will be marketing to new customers. Repeat customers are valuable as well. Don't rely on one or two customers for all of your business.

I say if you all are able to make it on one salary for two years or so, then she should give it a try - if she is truly good and can build a good network of customers, she will probably do well.

Let us know how it goes if she (and I'm assuming you are a team, so you, too) decide to take the leap.
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Old 05-20-2010, 07:29 PM   #16
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LOL my wife already works for one of the firms, I would say one of top 3 in her industry, maybe top 2.

thx for reply

aaah, well....
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Old 05-22-2010, 01:24 PM   #17
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There is a cap on Social Security but not on Medicare. I still think it's a brutal tax. It might be worth her while to establish an S-corporation to avoid some of it.
Bad idea. It's a HUGE red flag for the IRS. S corps have to pay a "reasonable" salary for services provided to the company. It's impossible to claim that a reasonable salary is $30/hour when you're charging the client $60/hour.
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Old 05-23-2010, 06:21 AM   #18
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Bad idea. It's a HUGE red flag for the IRS. S corps have to pay a "reasonable" salary for services provided to the company. It's impossible to claim that a reasonable salary is $30/hour when you're charging the client $60/hour.
I know some engineering S-corps where the charge rate to clients is about 3 times the salary of the workers. This multiplier is generally allowed to offset overhead and employee benefits
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Old 05-23-2010, 12:11 PM   #19
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I know some engineering S-corps where the charge rate to clients is about 3 times the salary of the workers. This multiplier is generally allowed to offset overhead and employee benefits
Of course; they all do this. It's not a single person S corp however.
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Old 05-24-2010, 04:51 AM   #20
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Of course; they all do this. It's not a single person S corp however.
True - The cases I'm thinking of are government contracts for 10-30 person firms. I don't believe the government client cares how many people are in the S-corp - they are only willing to pay a customary rate.

I understand it may be different in the eyes of the IRS, but hopefully the IRS recognizes what is a usual and customary rate regardless of the number of employees.
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