Switching from Full-Time Career to Contractor - Pros/Cons?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Switching from Full-Time Career to Contractor - Pros/Cons?

Post by Nathan Drake »

Kind of curious if anyone has made this move. Here's my current situation:

Single
Early 30s
Engineer w/ $90-100K income depending on bonus
6% 401K match; no pension
Health benefits that amount to roughly 8K per year
Low cost of living state, no state income tax
Indifferent about job; pays the bills, relatively stress free, get along with coworkers and boss, but am not necessarily passionate about it either

Been contacted regarding a contractor position in another state with the following details

$65/hour rate
Per diem
6% state income tax, cost of living would be slightly higher
Not sure how long the contract would be for, if overtime pay is offered, or possibility of a more long-term role

My analysis:

To do a thorough analysis I'm going to adjust my salaried position into an hourly rate including all benefits:

5 weeks of vacation, plus 2 weeks of holidays = 7 weeks off each year = 1800 hours
$90,000 / 1800 = $50 per hour * 1.06 (401K match) = $53/hour + $8000/ 1800 (health benefits) = $57.4 / hour + $90,000 (.0765) / 1800 (employer portion of payroll taxes that I don't have to pay myself) = $61.23 / hour

What to consider: health benefits are a rather large employer contribution ($8k), but I feel like my coverage is excessive; I have substantial savings to cover a high deductible plan for emergencies, which in reality probably means I'd only pay $2000 / year on the open market (which I already have to pay at my salaried position to cover my portion of premiums).

I'm also not aware of the following impacts:

1) Per diem -- how much is this generally for contract positions?
2) State income taxes -- if your "home base" is still in another state, are you required to pay state income taxes?

Looking at the hourly rate comparison I came up with, $65 / hour doesn't seem nearly enough to justify the risks involved, temporary nature of the work, and hassle of taxes/moving/etc. HOWEVER, per diem could be a large benefit depending on what those rates usually go for. This would also give me an opportunity to work with another large competitor in my industry to expand my resume. At the same time, it seems like I'd be more of a worker-bee than a team lead like I am now. What rates would I need to be looking at compared to my base salary to justify making a switch?

Curious for those that made the switch and whether they prefer it to a regular salaried position. Thanks!
Last edited by Nathan Drake on Wed Mar 05, 2014 8:31 pm, edited 1 time in total.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
User avatar
Ged
Posts: 3945
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by Ged »

As a contractor you will have to pay the entire SS and Medicare nut rather than splitting it with your employer.

You will likely want to carry additional liability insurance.

You will pay taxes in the locale where you work.
User avatar
jupiter_man
Posts: 69
Joined: Fri May 03, 2013 8:02 pm

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by jupiter_man »

You need to go a minimum 30% - 40% above your current salary - so go for at least $85/hr. Try to shoot for $90/hr.
User avatar
rob
Posts: 5247
Joined: Mon Feb 19, 2007 5:49 pm
Location: Here

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by rob »

Don't forget the old employer healtcare contribution and any 401K matching..... Idealy you want both of those as a contractor, so needs to be added to the hourly rate.

Add some buffer time to switch contracts and find a new gig.... that can add up in some cases. Again, there should be a buffer in the hourly rate.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
User avatar
sunnywindy
Posts: 655
Joined: Sat Jan 18, 2014 3:42 pm
Location: Central California

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by sunnywindy »

I look at this differently. I see both jobs as providing more than livable wages and I don't see your occupation disappearing anytime soon, i.e. you will always have a good paying job. Money is more of a secondary issue (but still important).

The real question is do you want to continue to work at a job that you are 'meh' about? Work is roughly 10 hours a day (work+commute), so it's a big part of life. Will you like your new job more than the old one? If yes, is it worth moving somewhere for that new job and all of the trappings a new life entails? Only you can answer these questions.
Powered by chocolate!
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by ResearchMed »

rob wrote:Don't forget the old employer healtcare contribution and any 401K matching..... Idealy you want both of those as a contractor, so needs to be added to the hourly rate.

Add some buffer time to switch contracts and find a new gig.... that can add up in some cases. Again, there should be a buffer in the hourly rate.
There is also paid holiday and sick time that you wouldn't get, and perhaps overtime (?).

And the costs of relocating for the new job.

Is there any guarantee of how many hours per week?

Or any idea at all of how long this would last, or if you could get your old job back - or, alternatively, how long it might take to get another job?
Would they have to give you any notice, or could you be without a job "at the end of the day" or week, etc.?

Is there a chance that it could turn into a regular employment situation in the future, and would you be likely to want that, if possible?

The hourly rate should be SUBSTANTIALLY higher than what you are currently getting.
Perhaps there is a headhunter on this Forum who can advise about the range of multipliers that tend to be used?

RM
dstac
Posts: 187
Joined: Sun Jun 02, 2013 5:12 pm

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by dstac »

Who your current employer is makes a difference too.

Govt= more stability
Pvt= often more flexibility

If you are pvt you should know your billing rate. For an engineer (though you dont mention type) on an hourly basis it's likely 2.5-3x hour base hourly rate. For you this would mean a billing rate of $120+/hr. I wouldn't recommend taking at less than 2x your current base hourly rate for a contract hire position.

When I went freelance I started at 2x and quickly increased it. Not a client batted an eye.

Don't take this deal since you already have a good working environment.
Topic Author
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by Nathan Drake »

sunnywindy wrote:I look at this differently. I see both jobs as providing more than livable wages and I don't see your occupation disappearing anytime soon, i.e. you will always have a good paying job. Money is more of a secondary issue (but still important).

The real question is do you want to continue to work at a job that you are 'meh' about? Work is roughly 10 hours a day (work+commute), so it's a big part of life. Will you like your new job more than the old one? If yes, is it worth moving somewhere for that new job and all of the trappings a new life entails? Only you can answer these questions.
Overall the jobs would be similar. I doubt I'd receive much more satisfaction since it's a similar role within engineering. And of course, it's hard to tell if the grass is greener. Right now I have a great boss and flexible work environment, who knows what the new client company would be like until I actually start working there.
ResearchMed wrote:
rob wrote:Don't forget the old employer healtcare contribution and any 401K matching..... Idealy you want both of those as a contractor, so needs to be added to the hourly rate.

Add some buffer time to switch contracts and find a new gig.... that can add up in some cases. Again, there should be a buffer in the hourly rate.
There is also paid holiday and sick time that you wouldn't get, and perhaps overtime (?).

And the costs of relocating for the new job.

Is there any guarantee of how many hours per week?

Or any idea at all of how long this would last, or if you could get your old job back - or, alternatively, how long it might take to get another job?
Would they have to give you any notice, or could you be without a job "at the end of the day" or week, etc.?

Is there a chance that it could turn into a regular employment situation in the future, and would you be likely to want that, if possible?

The hourly rate should be SUBSTANTIALLY higher than what you are currently getting.
Perhaps there is a headhunter on this Forum who can advise about the range of multipliers that tend to be used?

RM

No guarantee or idea of how long it would last or if it would turn into a regular role, I haven't followed up with the recruiting firm yet. Just trying to assess whether I should waste my time pursuing these sorts of opportunities.

The hourly rate as it currently stands is not substantially higher if you include benefits and taxes into the equation. HOWEVER, I do not know what the "Per diem" amount would be, which may be substantial.
dstac wrote:Who your current employer is makes a difference too.

Govt= more stability
Pvt= often more flexibility

If you are pvt you should know your billing rate. For an engineer (though you dont mention type) on an hourly basis it's likely 2.5-3x hour base hourly rate. For you this would mean a billing rate of $120+/hr. I wouldn't recommend taking at less than 2x your current base hourly rate for a contract hire position.

When I went freelance I started at 2x and quickly increased it. Not a client batted an eye.

Don't take this deal since you already have a good working environment.
Thanks for the input, and agreed...hourly rate being offered isn't substantially high enough to offset all the risks and hassle. But I'm curious how negotiable this is. As I mentioned, this offer was presented to me by a technical staffing firm, and they probably receive a substantial cut.

Also, has anyone ever asked their current employer whether they could switch from full time to contractor and negotiate a higher hourly rate? You're more expendable, but if I already have a good reputation established and would prefer the higher hourly rate vs. the benefits provided (health care for instance I feel is excessive), would this option be less-risky?
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
dstac
Posts: 187
Joined: Sun Jun 02, 2013 5:12 pm

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by dstac »

Less risky once the transition has been made? Yes, but you'll also rock the boat just by asking.

If someone approached me about this, I'd feel like they had one foot out the door. It could get interesting if you had an internal supervisor to ask about what they thought about being spontaneously approached.

Personally, if you feel like your take home is too low, I'd just bring it up with a supervisor. If the response is we can't afford more or look at all these great benefits, you could easily broach the adjustment of compensation from one category to another. From a corporate perspective it is a whole lot easier to have everyone on the same plan.
User avatar
tractorguy
Posts: 679
Joined: Wed May 19, 2010 6:32 pm
Location: Chicago Suburb

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by tractorguy »

Depending on your benefits, you need 30-40% more take home pay as a contractor just to break even with a good engineering job. In addition to the items you've identified, your company also pays its share of social security, workman's compensation insurance, and unemployment insurance.

If you get the 30-40% more, you are still not recompensed for the additional risk of being a contract employee. All companies I know of view contract people as the flexibility option that will be cut first in the event of an economic downturn. These downturns seemed to hit my industry every 3-4 years. Most contract employees at my former company were well aware of this and had as their number one goal to be hired on as "permanent."

My experience at Megacorp in the 2008/2009 Recession illustrates the difference. I was an Asst. Chief Engineer with about 40 engineers in my department. When the recession hit, our executive office implemented the plans they had in place for a downturn. It started with a Friday morning announcement that all contract employees company wide had to report to the local auditorium for a compulsory meeting at 10:00. At 10:00, they were told that my employer had cancelled all contracts and they were expected to clear out their desks and be gone by 12:00. It didn't matter if any of these people were good, bad, indifferent, or had unique and critical skills. The order came from the CEO and there wasn't any argument allowed.

Shortly after this, an early retirement offer/ severance bonus plan went out just before Christmas break. The affected people were told they had to give their acceptance by second week of January and plan to be gone by Feb 1.

After we found out who was leaving, all managers were told that we needed to reduce headcount a further 15% and to identify who was not critical to my department. These people were put into a "surplus pool" on March 1. They were kept on salary in this pool for about 6 months and were told they had this time to find another job within the company. I don't know the exact numbers but I think something between a quarter and a third of them were able to find a job. Many of them were downgraded when they did this. The remaining people were then given notice and laid off. They received the same severance bonus plan that had been offered the previous year.

This was an unusually severe downturn. Most of the ones I experienced weren't bad enough for the company to progress to the surplus/lay off pool stage. They all started with cuts to contract staff.

In summary, the contract employees were laid off with 2 hours notice and no severance pay. The "permanent" employees were laid off with 6 months notice and a severance package that was pretty generous.
Lorne
August
Posts: 76
Joined: Wed Dec 04, 2013 8:03 pm

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by August »

Per Diem is generally paid to workers to cover the cost of meals and possibly lodging while traveling. Depending on how much you typically spend while "on the road" will determine how much of a bonus it is. For meals only, it usually ranges from $40-$71 dollars a day and may be tax free. It is probably not a significant amount to affect any of your calculations unless you will be traveling a significant amount.
User avatar
Hayden
Posts: 1533
Joined: Tue Apr 16, 2013 5:13 pm

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by Hayden »

I would caution you that this is very industry dependent. For example, the numbers dstac cites for his industry are very different from the numbers in my industry. You need to figure out the situation in your industry.
Cellardoor621
Posts: 19
Joined: Thu Apr 05, 2012 9:26 am

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by Cellardoor621 »

I'll add a vote to not switching unless you're doubling your pay. I'm somewhat conservative, but my situation was earnings closer to 50k with lesser benefits (mainly due to lesser insurance so I could utilize an HSA) and I wasn't leaving for less than $70 an hour. Different industries, but the costs of going it on your own add up.

1. Demonstrably more expensive Health Insurance Typically
2. No 401k Match (although you've got better options since you're your own Employer)
3. You pay both halves of SS and Medicare
4. No paid vacation
5. No guarantee of work immediately after the current contract

There are positives of course, and I wouldn't go back personally. Just make sure you think about it all, and I would definitely go for a larger margin that the one you described above.
User avatar
rob
Posts: 5247
Joined: Mon Feb 19, 2007 5:49 pm
Location: Here

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by rob »

tractorguy wrote:My experience at Megacorp in the 2008/2009 Recession illustrates the difference. I was an Asst. Chief Engineer with about 40 engineers in my department. When the recession hit, our executive office implemented the plans they had in place for a downturn. It started with a Friday morning announcement that all contract employees company wide had to report to the local auditorium for a compulsory meeting at 10:00. At 10:00, they were told that my employer had cancelled all contracts and they were expected to clear out their desks and be gone by 12:00. It didn't matter if any of these people were good, bad, indifferent, or had unique and critical skills. The order came from the CEO and there wasn't any argument allowed.
and I have seen exactly the same thing as a "permanent" employee several times.....

I have been both for long periods and there are pro's and con's to each arrangement..... stability used to be one of those differences but in the last decade in IT it's been more similar both sides, so I would rate that less than I used to. Having said that, the extra costs have to be taken into account.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
Topic Author
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: Switching from Full-Time Career to Contractor - Pros/Con

Post by Nathan Drake »

Thanks for the great replies everyone.

Sounds like I should just keep going with my current job.

I'm sure being a contractor has its pros, but I would imagine it's best when you have a lot of experience with different companies and have the ability to quickly find work and don't mind the risks.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Post Reply