The Business of Software

I have been offered the opportunity to take a large project on a 1099 basis.

Doing this would mean I would have to leave my current full time position.

So far I have been working on this project for about 20 hours a week and have had no trouble being paid; however the extra hours are starting to force the need to make a decision.

What is a good formula that I can use to determine what 1099 rate would be comparable to my current W-2 rate?

Also how can I factor in other things such as health care 401K etc

Just looking for anyone who has either been burned by or slayed this dragon before.

Thanks

This may help you out in determining a rate: http://donxml.com/grokthis/articles/249.aspx

I hope this helps.

Q'ban Phury

You're going to have to pay 15% social security instead of 7.5%, so that's the first bit. Then add up all the costs of benefits you receive as a full timer (health insurance, retirement, paid vacation, paid sick days, etc.) and there ya go.

If you consider the new situation to be riskier than your current one, you may want to add something extra to compensate you for that risk.

For a sanity check, work backwards.

What is your desired nett income?
Add taxes to be paid.
Add benefits as per Joel's list.
Add oncosts: phone, travel, equipment, clothing, education, fees, salary for the wife, INSURANCE, MARKETING ...

This ballparks your required gross.

Now, how many hours do you expect to bill? I used to think 1000 hours/annum was roughly right for contract work. It still is, but the variance can be alarming :-)

I forgot parking fines.

Add 33%-50% depending on what you think you can get away with. Expect to be finnacially up (including all lost benefits) when contracting, because you're not being offered job security.

Thirty percent above a regular job is more or less the break even point financially, assuming you work 50 weeks a year and collect everything you have billed.

With the uncertainty of contract work, the collection risks and other business risks, like getting sued, you probably want at least 50% above a job to switch over.

That is, if you are making 80K at your job then you want to get at least 120K or $60/hour to go 1099.

If you are

1) out of work

or

2) the contract job will add valuable skills and work experience

or

3) you just prefer the contractor lifestyle

you can reduce the 50% premium. Otherwise you are destabilizing your life for nothing.

Thanks for all the replies

I think there is more to consider than just the rate.
Think about what you will do when the contract is up, if you want to remain a contractor then plan on investing some time in marketing etc. so you can get another contract.  Make sure you have a plan for what to do if the project gets cancelled unexpectedly.

Have a contact and get it reviewed by a lawyer.

It sounds like you are going to work for this company full time so why do they want to have you be 1099?  Why not hire you? If you are working for them full time and you are the only employee of your company it is quite possible that the IRS would consider you an employee if they checked.

Good Luck

If you've never contracted before, I can just about guarantee that you are underestimating the risk factor involved.  Projects start and stop all the time...the executive sponsor quits, budgets get revised, all sorts of random events can conspire to put your ass out on the street.  You are expendable, that's why you're a contractor.

If you have a mortgage, kids, or will need to pay your own health insurance (i.e. you're not covered by your spouse's policy) DO NOT quit your job to become a contractor.

There was a time in the late 90's when you could quit your job and double your income by freelancing.  THOSE DAYS ARE OVER.  If you're not prepared to deal with extreme income volatility, stay where you are.  I've been contracting for 3 years now and I've seen this over and over.

How do you know it's "long-term?"

When they put you on a contract, you lose all certainty. Contract means they can sack you tomorrow.

With a normal job, you know for sure you're getting paid every week for the next two or five years, even during holidays. You know medical expenses are taken care of.

During those two or five years, you can count on annual increases, probably boosted by the occasional promotion. It also gives you a more solid career. Anyone wanting to hire you in five years time will have to offer more than you're currently making.

On a contract, you might be without pay for nine months. When you get your next contract, you will find the rates have gone down. In five year's time, you will get offered the same or lower rate than you're offered today.

Permanent jobs are the way to go.

"What is a good formula that I can use to determine what 1099 rate would be comparable to my current W-2 rate?"

Take your annual salary, drop three zeros. That's the hourly rate you should ask for.

<Math>
Annual salary/2000 = current hourly rate.
Add 7.5% for employment tax
Add healthcare expenses
Add hardware expenses
Add software expenses
Add lost 401(k) matching
Add risk factor (include the fact that as a 1099, if you break two fingers you are now not earning money for 4-6 weeks)
Add loss of IT support (in theory, if you're not coding, you're not earning)
Add books and training expenses
</Math>

Notes:
1) Do not accept firm fixed price until you've been contracting for AT LEAST five years.
2) Let the client know in no uncertain terms that support outside business hours incurs a surcharge (I'd recommend 10% after 5pm, 25% 9pm-11pm, double after 11pm and on weekends)
3) The factors above are guidelines, but they're part of how the IRS defines "independent contractor," so the company is well within their rights to put this stuff on you. Obviously you can fudge it (i.e. billing the client when you're actually fixing your network or posting questions on JoS), but recognize your baselines.

*) I realize you likely won't get 2x your current hourly rate, but I would honestly start there.

Philo

"Contract means they can sack you tomorrow."
"With a normal job, you know for sure you're getting paid every week for the next two or five years"
"You know medical expenses are taken care of."
"During those two or five years, you can count on annual increases,"

Where do you work?!?

Philo