Essentially as a contractor you should be making at least 2.5x what an employee would make. So if an employee is being paid $120,000 as is in a similar position as you you should be getting paid $300,000/year so you can make the same salary + a little more for the added costs of being a contractor.
What are these extra costs you might be wondering they are: Business registration, licensing, certification, life insurance, private medical/health/dental insurance, taxes, vacation, technology, bills, travel, parking, emergency funds, liability, general and umbrella insurance, car maintenance, car fuel, carl detailing and regular cleaning, house maintenance (yard, inspections, upgrades, insurance, etc.) or rent, payroll if you get your own subcontractors, overtime pay (if you end up working 60 hours a week you need to add in the costs of this. If your employer wants you to work more than that you can renegotiate your rates to accommodate), etc.
As an employee there is about 50% or more costs that you do not see as an employee. It is known and expected that contractors will be paid way more than employees as contractors take on 100% of the risks.
PTO: if you get 3 weeks out of 52 paid, then account for 6% more to cover that
Taxes: Employer portion of payroll taxes (let's say 8% in US) and B&O taxes that your state will likely want (1-1.5% of revenue)
Downtime: If it takes 2-3 months/year between projects, add 30% to your rate to cover that. Some may see this as a bonus time to recharge, but you are still likely be working on business development and marketing at least for a bit.
Licensing and Business registration: depends on your local requirements. In my city it's $300/year for both. This presumes you register an LLC and not just have a sole proprietorship.
Medical insurance: You can get an inexpensive bronze plan or high deductible plan directly from insurers (this comes with HSA you can contribute to) or get coverage from your partner (if available). I used to be paying around $400 for a bronze plan.
Umbrella insurance: Not too expensive, but may require coverage raised on your auto and homeowners insurance. Let's say $100/month, although I'd advise having it anyway.
Parking and auto: depends on whether you work remotely or not; let's say $200/month.
Total: 45% on top of your salary rate + $1000/month; if you are comparing with 100k salary, then you'll need 60% more to cover additional expenses.
Note that most of these expenses can be expensed, so they will be subtracted from your before tax income, thus reducing your taxes. You can also include car-related and home-office related expenses, which will further reduce your taxes.
I may be missing something, but it should give you a rough idea on what to expect. This is all based on personal experience.
75,000 / 2000 = 37.5 (average 2000 work hours PA)
37.5 * 2 = 75
Add three 0 and 75,000
These are all expenses that have nothing do with being a contractor vs an employee. Only some of both category will need them.
2.5x is the golden rule. You will need to double the salary to cover additional expenses (some of which weren't mentioned, like employer's side of FICA in the US, time spent on sales because contracts end, legal, etc.) you will incur. The .5 of that equation is your profit. Because you're running a business.
Almost all of these just seem like my normal expenses. Why are any of these aside from business registration, private medical and payroll "extra" costs?
licensing, certification, life insurance, vacation, technology, bills, travel, parking, emergency funds, general and umbrella insurance, car maintenance, car fuel, carl detailing and regular cleaning, house maintenance (yard, inspections, upgrades, insurance, etc.) or rent
You're a business now and this is upkeep. Business expense. You would receive training and licensing under normal circumstances through your job.
> life insurance
This is provided as a benefit by most businesses to their employees. Talk to your HR. If you're working for yourself, you pay for it now.
This should be obvious. No work, no pay. So vacation literally costs you double. Loss of time + the cost of vacation.
Computer equipment to do the actual work. Nobody will provide this to you for free.
> bills, travel, parking
Nobody will reimburse you for these expenses. If you have to visit the client on-site, they're on you.
> emergency funds
You must keep 3 month's of salary at a minimum sitting in a bank account at all times. This is a cost of doing business. There are ups and downs, don't expect contracts to come in immediately one after another. It doesn't happen.
> general and umbrella insurance
This should be obvious, you bear 100% of the cost of all types of insurance.
> car maintenance, car fuel, carl detailing and regular cleaning
If you use a car to get to the client, well, this is obvious.
> house maintenance (yard, inspections, upgrades, insurance, etc.) or rent
If your home is your office, all of these are now business expenses to some extent even if you had to do them before. You're spending double the time in your house. That will increase upkeep, electricity, etc.
The overhead rate for an employee is I think a lot more than 50% I have heard 300% for the UK for bog standard tech companies - the us might be a little lower due to the way heath care is structured
Really high end RnD (world leading ) can go well over 500% - labs and specialist shops do cost a lot.
Put away a nice big rainy day fund. I try to aim for 3-6 months of full living expenses. You'll need this to fill the gaps between contracts.
For me, contracts typically last around two years or slightly less. This is probably anecdotal, so take it with a grain of salt.
It usually takes me between 2 to 4 months to find a new contract, but I work strictly remote, so your mileage may vary. Try to keep your finger on the pulse of what's going on. If you can figure out when your contract will end, this will help mitigate the amount of time you spend running on rainy day money.
Pay your income tax installments on time. Every day you go without paying them costs you interest to CRA. On the topic of CRA, get an accountant to help you figure out what you can expense. You can expense all kinds of things including utilities and part of your mortgage.
Get a GST/HST number if you're making more than 30k. You'll have to pay GST if the work you are doing is not done on a remote server out of country.
That's all I can think of off the cuff. Get in touch if you have any questions
Contacting has been a great experience for me but it takes some time to get used to the risk and learning to anticipate the future.
Option 1: Don't get a gst number until you hit 30k. To remove a gst number is a lot harder than getting one.
Option 2: Incorporate and get your gst immediately. Advantage if you are buying materials.
Option 3: Get your gst and do not incorporate. Lowest tax rate/highest cost for taxes.
Knowing when your contract is to end should help you decide. In your case I would incoporate immediately if the contract is > 6 months.
Best thing for you to talk to an accountant.
How is the company paying you? Are you going through an agency? If not, you might have to get an independent insurance.
The contracts are usually full time equivalent and I usually only have the one, so tracking time is pretty easy.
* Hours were fairly flexible
* Not too much supervision, was mostly given things to work on and expected to finish them in a certain amount of time
* Didn't get pulled in to as many meetings in the office
* The pay was excellent
Some things I didn't like:
* No/little vacation/pto/sick
* If you don't work, you don't get paid (if you're paid hourly)
* No/little job security. I was around for 2 rounds of layoffs and had a young child at home, so this wasn't ideal
At the end of the day it made more sense for me to go back to a normal employment role due to family and a few other factors with job security. I did enjoy my time as a contractor though. Enough so that I still pick up hours through some old employers occasionally.
I don't think anyone really punished the company though. They were a pretty small and insignificant web agency just hiring a couple local people but tons of off-shore work.
Does that mean that ICs generally work remotely? Or what is actually the deal with company offices and ICs?
Moving ahead, I wish I could help out the industry by shielding the naive new workforce from mis-classification and similar forms of work exploitation.
Game theory and all that applies. Best recourse is not to fall into one such firms.
In broad terms the contractor vs employee test is similar across the world, because is derived from the same forces (tax and welfare avoidance for the employer, better cashflow for the employees that don’t care about welfare yet)
You really need to check in your jurisdiction but in general: you have work hours vs contracted goals, you have no agency to work for multiple clients concurrently, you work on employee machinery.
Work remotely locally etc is a consequence of those general tests. It help thinking that it’s a contract between to business. Would you ask a cake shop exclusive work, to be at your house 9-5 and to work on your oven? That’s not a cake shop, that’s a baker.
In USA health insurance is probably the most expensive thing for a contractor but I guess in Canada you have your bases covered.
My advice is to subcontract other people as soon as possible and invest the extra time to learn about sales, marketing and negotiation, then go after new business. Currency exchange rates are excellent for subcontracting from Brazil or Argentina.
Good luck and drop an email if you want to ask anything.
Employees who have a hourly before tax pay of $25/hr often cost $40/hr to the employer with their contributions. Add benefits and other costs to this.
You are not a contractor, you are a small business and will have to carry the costs of small business.
I would get some local advice. Also to be a contractor in Canada under law you must meet the burden of being an independent contractor (buying all of your own equipment, having expenses, have risk of losing work) and have more than one customer.
Contracting is awesome. I have written about it before - learning about the difference between being a freelancer, contractor, and consultant will go a long way to help you assess your value offering and opportunities that come your way.
I'm Canadian and have been a contractor since I was 19 or so, happy to chat offline if needed.
I just can't do 8h days 5 times a week of this kind of work consistently. So if you compare/base your compensation to FTE, factor in that no FTE comes to work in the morning, writes code for 8h straight and goes home. I add 30% just for this over the FTE salary, aside from other differences.
Have a plan for that.
Not "leads", actual qualified clients ready to pay for my service if I should accept the terms.
- Logistics: set up a domain with a one-pager landing page, get some simple business cards, and get a work email. I ended up spending $50 for an LLC and getting a business bank account and card. I use Freshbooks for tracking time, expenses, and sending invoices.
- Legal: Get a lawyer (and a tax person) who understands what you're doing. It's worth the <$1000 you'll spend just for peace of mind. I found mine through a local startup incubator. Your lawyer can draw up a Master Services Agreement you sign with clients once that goes over IP etc. Then for each project, you simply sign a one-pager Statement of Work that has your rate, scope of work, duration, etc (which can be updated and expanded as you go by re-signing).
- Getting clients: this is literally a sales/marketing funnel. Share your business with your network , start getting incoming leads from folks, screen clients , closing contracts. This is actually one of the reasons I decided to consult, I want more hands on sales experience. Advice from a friend: spend min 1h each day emailing or whatever else necessary to land new clients.
- Doing work: take on a customer-facing mindset (like you would in a support role)--make them feel comfortable, make them look good, and make them successful. Obviously makes sure your work is incredibly good--your best sales channel should be referrals.
Maybe this goes without saying, but all of the above is MUCH easier if you have genuine experience and expertise. I wouldn't recommend this for someone in their first 5y of being an engineer/designer etc--build specific experience in an area and make the jump later (for ex, I lead a design team at a YC startup and taught design at UM, not sure I would have done this 5y ago).
 https://muledesign.com/designbook/screener.html (from https://abookapart.com/products/design-is-a-job)
I have done both, and I typically factor it all in for pay. If you're hourly that means that you get paid for what you work, which is great if you've ever worked a salaried job and put in 50 hours a week.
But it also means that you won't get vacation (most likely) so you either have to make up for that or factor in the amount of days you don't want to work into your schedule. So if you want to take 3 weeks off a year, factor that into your pay and reduce it accordingly.
If you get paid overtime, then factor that in as well. This all sounds like a lot but my rule of thumb is as a contractor I should be making at least 20% more than as a FTE. This isn't the case based on my last job of 50+ hr weeks.
That isn't even to start into how you approach the team and your code. As a Individual Contributing contractor (non-contract to hire), you probably won't be doing maintenance, setting schedule, or a lot of other project planning like activities. You'll be laying tracks down how they want. That isn't to say you can't make suggestions, and make the code more maintainable but that's not your primary focus once you're on site, it's to fit in to the team and support them. To make them better where they'll accept advice and to follow coding standards where they won't. While this is also true of FTE in a lot of cases, you aren't going to be maintaining this beast so if you bring it up (typically a few times) and they shoot you down then you did your best.
Don't go rogue, if you see a better way to do something and you want to show them, it's OK to work up a POC but I typically don't charge for that if they don't take it.
This is ALL my opinion, I've seen so many different types of contractors, some don't care, some go rogue and do whatever. The whole point is that at the end of the day you have a set time on the project and you have to keep that in mind.
EDIT: I use pomodoros to justify to myself the hours I'm billing. This is a personal technique I really like, but it helps me identify when I'm going over and under what I should be doing in a day and to have a justification to myself (meetings or other such things).
A few months ago I was contacted by a previous employer, asking if I'd be interested in a short-term contract gig (similar pay to what you're describing, but in Australia).
I'm coming to the end of this contract and I have another one lined up once I'm done, working 4 days a week from home and making my own hours.
I have to say that I love the freedom and extra money contracting has given me. Of course, there are a lot of extra costs to consider (no paid leave or superannuation, need public liability and professional indemnity insurance), but even considering all of that I'm better off financially that I was at any previous full-time job.
I wouldn't recommend contracting if you're only just living within your means (e.g. paying off a hefty mortgage and supporting a family) where being let go would leave you in an untenable financial position. Contractors generally have far fewer rights than a full-time employee, and my current agreement states that my contract can be terminated with a day's notice (YMMV).
I hope you have the same experience I've had, all the best!
First contract won't give you the best rate and you will most likely not be in a position to negotiate a great deal. But that does not mean you should not try! Negotiate, negotiate, negotiate.
Delivering value is different than just doing your "job". Help the business and carry more than your weight. This can also mean questioning(in a polite and constructive way) what you are doing. If you can see that the problem could be solved in a better way, then speak up.
Once you have shown your value, then you are in a better position to negotiate - so use it. The more you know a business the more you are worth to them. The more experience you have as a contractor the more you are worth to new clients.
BUT as someone else also very wisely pointed out. It is a game of diminishing returns. By being a contractor you also somewhat step out of "normal" career advances. You can raise your prices up until a point, where without a doubt you can live a very, very comfortable life. But 10 years down the road you are not necessarily advanced to a higher position. Which can be fine, but you need to think about it of course.
You could contact 10x Management (they offer "Agent on Demand" which was discussed on HN) for help / guidance. I've been represented by them for 5 years and they do tremendous work (they're professional agents / negotiators..!)
Email me if you want more info (email in profile). I'm Canadian and have been doing nothing but contract work for US customers for the past 5 years.
Do you have flexible time? Like being your own boss kind of deal?
Know the law, at least a little bit, learn to ask for a more than you are comfortable with (companies almost always are willing to pay you more than you think) and document everything.
Be sure to keep email trails of work requests, especially stuff over the phone. Numerious times (when I first started out) I had a client say "do this" on the phone, I do the work, then they said "I didn't ask for this". So always verify work requests in writing/email, even if it seems redundant. It will totally save your behind.
I often times will mention I need confirmation, explicitly, even with long time clients. Like "Do I have the ok to start on project XYZ?", and I let them know I need an email back with a "yes" before I start work.
It may take some client training for them to get used to this kind of thing, but if they are confused I give a brief explanation on past experience where I accidentally misunderstood a client request (I take responsibility) and did work I wasn't asked to do. I always get a good response from this, and the needed "yes".
* You earn more than full-timers, the performance expectations from you are also higher. If working with other devs in your area, you are expected to be stronger and more efficient than full-timers to justify your salary and status of a contractor. If working on the project alone, you are obviously expected to be the technical authority and go-to person regarding any issues related to the technology stack you are working with.
* Once you are on a project, you have less freedom of choice than the full timers what kind of work to do. Usually, you will get what the full timers don't want to or don't have the expertise to do. For example, at a bank, the full timers usually implement new features, while the contractors clean up the bugs. Also, banks and big telecoms have separate dedicated budgets for contractors.
* So far, I have been lazy looking for gigs, finding them mostly through recruiters. My biggest gig and the one I mostly enjoy has been lasting intermittently for almost three years. I got that far with the client by delivering over and over again results above and beyond the client's expectations.
* The mindset of a contractor is different than the mindset of an employee. You will no longer care about meetings, "promotions", titles, asking/getting vacation days, Monday Syndrome/TGIF, performance reviews etc. In fact, your "performance review" will be whether or not your contract gets extended. You will care about getting your own (best) hardware equipment and software/dev tools licenses, assuming responsibility over professional development and delivering the best results you can. Also, as a new adopted mindset, you need not care what kind of work you get given by your client, your goal is to deliver excellent results for any kinds of projects.
* Starting rate on a gig is usually determined by the market with ~10% negotiation room. For example, the recruiter will call you and have a second or third question "so what is your hourly rate?". If you name a figure 10% higher than what they have in mind, they will usually say that is above their range. From what I know, the reason for that is companies have fixed budget for contractors and when starting the search, during the conference call with recruiters, they set their rate expectations.
* So far, contracting proved to be so much more fun and intellectually and financially rewarding than full-time employment. Once you start, there is no going back :))
Best of luck.
But he pays no taxes.
Now he is on a student visa there.
And if you do not have a family it might work for you.