* Your bill rate isn't correlated with your salary
* Any bottom-up bill rate you back out of your salary is likely to end up with you undercharging
* Bill weekly or daily, but never hourly, never hourly, never hourly; you are not a furniture mover
* Don't rely on rules of thumb for accounting; find an accountant (get them referred to you) as soon as you're reliably making money
* Part of the point of running a freelancing business is to have your eyes out for opportunities to bring junior people on to your team; read Patrick McKenzie's most recent piece about "productizing" consultancies to see one way to do that. Consulting companies don't scale to VC-palatable multiples, but they do pretty nicely for a couple founders, and they tend to pay their teams well.
If you're in a full-time job now and have never tried consulting/freelancing, and you're the kind of person who thinks about one day starting a company, I emphatically urge you to hang up your shingle and start a consulting business. If you're the kind of person who will do well in entrepreneurship, and you can handle 50% more job stress than you have now, you'll make more money consulting and learn an amazing amount about running a business.
The legal department in Prague sent me a new contract and it wasn't the two page paper that I got accustomed to from the previous contracts.
It was 50 pages of undiluted legal gibberish all inconveniently packed into a Word document.
After feeling miserable for 3 days I actually went through this thing and while I didn't like it wasn't quite the expected horror.
Of essence where 3 pages, really. Setting the terms and the pay. The rest was mostly CYA legalese and copyright questions.
But the most interesting thing was that lil' ol' me, a one man show, was actually able to negociate a few points, which where unacceptable to me and actually get them ammended.
This episode always comes to mind, when I'm reminded of the less fun freelancing aspects.
I once got pretty much free reign to rewrite a section of a contract on IP ownership that needed to be signed ASAP.
The only time you should charge less than that is on very long term contracts with hundreds or thousands of hours, and then, only hesitantly.
People make assumptions based on what you charge - frankly, I've found that people tended to blow me off when I charged much less than this, and actually listen when they know they're paying a decent amount for your advice. There's a whole psychology to pricing that needs to be taken into account.
If you're looking to augment staff as a contractor, whoever hires you is going to want to compare your hourly rate with what they're paying their team — so it's going to be tricky to break through that ceiling.
But if you're working with clients who have problems to solve, and you're hired to solve one or more of their problems, what you charged should be tied to the financial upside that business will experience when all those problems go away. (e.g. pricing for them, not you and your former salary.)
I gave a talk last night on value-based pricing for my local Ruby meetup, and covered some of this: https://speakerdeck.com/brennandunn/value-based-pricing-for-...
It's only after you stop selling time and start to understand what it is that drive your customers to call you that you'll ever break free from the hourly rate comparisons.
"Yeah, think of the break you're getting - where else could you buy a 400k/year caliber employee for the handful of hours you need them? It's a great bargain!"
I had a recruiter try this with me. The rates were much lower (I'm not in a top 5 market), but he still tried to convert it into an annual rate.
I think I was being negged so I would lower my rates and they could more easily make the sale.
But it's not full time and that's precisely why it costs roughly 3x contract rates. A portion of your year is "down time" searching for projects and no one is paying for that. So you put that into your project costs.
If the companies you're pitching don't realize this you're probably pitching to the wrong companies because it's pretty well known.
EDIT: Also, if they want a compare then have them compare you coming in doing this project to the cost of hiring and training a permi and then letting them go. Most likely the turn-around for a permanent employee is going to be 6mo at an absolute minimum (unless it's Zynga or some serious scumbags) where as your project could be hours or weeks.
I didn't know that.
If you're looking for more free time, expect to earn less. In order to earn full time income you'll need to sacrifice your time. I'm fine with this. I earn enough to support the family, but not enough to buy a fancy new car or even to live in a nice neighborhood. I'm happy living lean and don't want a life of luxury. I find a more humble existence much more fulfilling. It really comes down to what sort of lifestyle you're after.
Smart move with leaving the SEO/affiliate game, as that is racing towards the bottom as more people flock in (you know the type, following the marketing formula to sell an ebook to get that email to eventually close) and search engines tweak their algorithms. I always felt a unease doing that kind of work. Once all the noise dies down, it comes down to doing good work for good companies. Since focusing on being open and transparent and proud of my work, I'm getting close to the point where I am not chasing contracts and can pick and choose clients. And like you, I've been living lean and don't need six figures to live a full life.
Luckily here in the UK there is a thriving(ish) market in contract work. Short time, usually project-based, better paying than perm work. So far it's been quite fun.
0.5 * Previously Monthly Revenue <= $1200
Previously Monthly Revenue <= $2400?
Current Job <= $1200/month + Health Insurance?
If you're going to go contracting don't bother with an umbrella company! It's absolutely ridiculous how tax efficient you can be as a limited company (especially if you can set up you significant other as a director). You're looking at just under £40k per director completely free of personal tax and NI if you set it up right. You still have to pay corporation tax and some VAT on that amount and there's all the overhead of managing the company, but it's seriously worth it - especially with a good accountant!
(The idea is that if the company bills 100,000 pounds
it pays corp tax of 20,000. Then the director can withdraw the profit of 80k as a dividend. Since a tax has already been paid on the 100k the 80k is free of income tax. However income tax is charged at two levels in the uk (25% and 40%). The govt says that the first level of 25% has already been paid (by corp tax at 20%). The 40% only kicks in at 43,000 a year - so you can as a director withdraw 43,000 as dividend and not pay "extra" tax on personal income.
The parent is suggesting your spouse can be a director and do the same, effectively making a 80k pa net household income on 100k revenue. (And if your are in a stable threesome it's even better :-)
If it is legal send me your accountants number - my mail is in the profile!
By the way we met at one of the find a tech job meet ups recently. I'm interested in your OSS in government idea. How about you drop me a line next time you're in the city? I'm ben at perurbis.com (no website yet)
And of course wasting no time plugging the Open Source campaign - http://www.oss4gov.org/manifesto
I'm with SJD and yes, they still do have that horrid excel spreadsheet!
I'm not affiliated with them, just a happy customer. You can read a bit about them in this interview http://elitebusinessmagazine.co.uk/interviews/item/a-waterco...
Disclaimer: They do also have an referral scheme, feel free to nudge me for my token if you're thinking of signing up (or don't, I'd still recommend them - referral voucher or not:)
I use Nixon Williams at the mo, who are more expensive but do seem to handle everything (i.e. tell me exactly what/when tax is due, things need to be signed etc etc)
I then spent about two weeks telling people that no, I'm not interested in a perm role, and got work at about the end of week 3. (for reference I'm a server-side C/C++ programmer with an interest in crypto and about a decade's experience).
That's when I registered a company, bought domain names, got accountants (nixon williams, they specialise in this, seem to be ok so far) who handled tax registration etc etc.
-- edit --
happy to answer any further questions. I'm only about a year in and on my second contract.
As in a specialist looking for top notch talent or just a cv mover?
Mostly because I have never met one of the former ;-)
They are just CV movers but they often know key individuals within different companies and even provide kick backs. As slimy as they can be at times they have connections that a sterile CV in a pile of sterile CVs just can't have.
I would suggest instead to look at what the better freelancers charge (in the US, somewhere in the 50-100 USD range) and figure out where you fit in that based on your skills, experience, portfolio and available work.
I assume the annual salary is already a good summary of what an employer is willing to pay you based on your area,skill and experience, and the "divide by 1000" is just a rule of thumb to translate it to your rate.
Why would I take on all this extra responsibility and risk to make exactly what I did before (or worse, just the median) when I didn't have to?
There are two reasons why I went independent: The first is because I would be able to take off huge chunks of time for side projects. The second is I would make at least twice as much as I used to (after taxes, insurance, etc.) despite taking off huge chunks of time for side projects.
Also, you cannot expect 50 weeks a year of utilization. If you're smart, you assume 35 weeks a year, and price yourself with that in mind. If you have higher utilization, you have a good year. If you don't, you have no worries.
Moreover, I'm at a client now where I gave them a "fill my rolodex rate", which I was very hesitant of doing. We're tying up after the initial term, because the reason why they couldn't afford me is they have mostly systemic organizational and fundamental business issues than they do technology issues.
Diving it by 100 and taking the result as a daily rate seems a bit more reasonable (and billing by the day is a better idea anyway), but is still on the low side.
Once you factor in 50% taxes, you have to bill 200 days a year to get the same income as before.
On top of that, I plan for 40% of time spent doing billable stuff, and 60% of client search, marketing, networking, and general business handling.
Once you take all that into account, freelancing suddenly becomes less attractive.
Prospective freelancers are often warned that they won't be billing 40+ hrs a week because of ancillary non-billable tasks you have to handle, but this is vast overestimate.
But let's do some back of the envelope math:
$800 day * 250 days (10 holidays) * 75% (3/4 billable)
- 10K ? Social Security
- 5K No more 401K match
- 10K Health Insurance (Multiply for a family)
- 5K Training
- 5K Other benefits (leave, sick days, life insurance, etc)
Some of these numbers may be off, and I've missed some things, but this is roughly in line with the original post.
 Consulting would be more like 9/10 billable or even more. Some contractors take the absolute minimum required time off since they're paid by the day (I've heard of guys who haven't had a consistent week off for years), which would put them at 11+/10 relatively.
The Internet using public is changing. Websites are commodities to most people. They don't want to pay and its a huge hustle to get a gig that pays what you're worth. People see the free website they get with hosting and assume you should be able to do it as cheaply, quickly, and the only reason they come to you sometimes is because they just don't want to use the free website builder. They think your job is as valuable as the free site builder and often see you as a mechanical Turk that would just do what they'd do with the free tool.
I see the future of indie web dev being in services, not website design and development.
I've found the latter to be considerably more lucrative and engaging. The work I've done ranges from language teaching software to automated trading bots for second hand books.
The market for this sort of work is so screamingly hot right now that if I did all the work that my current clients are asking for in series, I'd be booked into early 2015. And that at a daily rate that the me of three years ago would have trouble even asking for at the negotiation table.
You're right that there's a huge market now but I would qualify that statement and add that the future is in specialized web applications for people with domain knowledge and an actual business plan. I might have been doing something wrong not to find those people or maybe I was unlucky.
One problem I have that's similar to what you're talking about is people either have a huge budget and an endless supply of soul-crushing and pointless work for me to do, or they just can't afford me at my rates.
More recently I'm finding a sort of sweet spot in bootstrapped companies that have some revenue and can afford to bring me in for one or two weeks per month. Those are my ideal clients, as I'm not very good at dealing with government/BigCo.
I love talking about this stuff, so if you want to talk shop more at some point feel free to ping me via email (in profile).
I've always been worried that once you stray from the protections offered in a group plan, the insurance will just dump you if you have any major issues. And then once you're dumped it's a "pre-existing condition" and now no one will cover it but a group plan - forcing you to join a company again.
There are other options, but they work differently and seem scary to most people who are used to letting the company deal with it at a first glance.
Source: I was a health insurance salesman for a short period of time, and was licensed to sell for most of the insurance companies out there. It's part of why I'm not scared of going out on my own and freelancing -- I know enough about how insurance works not to worry about it, and can even sell myself a policy and get commission. However, it's been a couple of years, and I probably can't give you accurate, detailed information -- many of the insurance companies are revamping their business models and policies in anticipation of Obamacare.
At least here in Virginia (I'm no insurance expert), a group is 2 or more people. My wife is officially a shareholder of my company, and so she and I have a group policy. We pay a little under $1000/mo to insure the two of us and our two girls.
I guess I could just ask an agent. I'm in IL, and a group minimum is also 2.
It did mean, though, that I have my own policy and my kids are under my wife's policy. So if my wife and kids go to the doctor a bunch and pay their deductible, should I need to go I'll have my own deductible to pay.
The small company I work for offers group insurance, but we all have to pay full price - they don't subsidize any of it.
They do take it out of our paychecks pre-tax so we don't have to pay taxes on it - but it would be tax deductible anyways at the end of the year.
My last employer was paying about $1.7K per month for a family of three. Costlier than usual because it was a very good plan. I could not find a with similar levels of coverage and deductibles for cheaper outside.
The key thing that varies between plans (I am based in California) include deductible and coinsurance, which can be traded off with monthly premiums. Lower the former two, the higher the premium.
I pulled out my families older insurance claims data when my employer was paying to estimate my future expenses for each family member. Based on that, I considered various plans and ended up choosing a plan with higher deductibles but lower monthly premium (~$600 for the family). Mostly likely, this will save me a lot over the low deductible plans. This is true even when I expect to be paying just about as much in deductibles/coinsurance per month on an average based on the past data. If things go wrong, I may end up paying a lot more, but still capped by the out-of-pocket maximum that is not much higher than $1.7K per month.
I'd like to think I have decent people skills, but when it came to sales, networking, negotiating,... it wa a rough ride to the point that I'm back to look for a day job after 3 years, despite loving the flexibility freelance gave me.
You definitely need the right personality (or develop it), and be mentally tough to endure this lifestyle (especially in the beginning) or it will beat you to the ground.
Oh, there is one more tiny matter: taxes. Make sure to
take a 1/3 of each invoice you are paid and put it into
savings for taxes. Seriously, you don’t want to make this
Also, you will have to pay taxes quarterly (well, more specifically, to make estimated payments each quarter). Withholdings at day jobs abstract away the quarterly obligation, allowing you to file once a year (and, usually, get a refund) but freelancers aren't allowed to hold money owed for 9 months and collect interest; they have to pay more quickly.
Here's the solution I came up with for the brokenness of the freelance economy (especially the time wasted in marketing). http://michaelochurch.wordpress.com/2013/05/07/fixing-employ...
It does require you to sell some of your upside, but that's actually a really good thing, because the option holder (who is probably richer and better-connected than you, and therefore requires an order of magnitude less effort to market you) now has an incentive to participate in your marketing process.
Have you ever tried not paying your taxes quarterly? The penalty is only a few hundred dollars. As in, one or two billable hours. As in, not enough to justify taking time off from paying work to do them those extra three times a year.
In years where my memory is especially good and I remember that I'm supposed to do quarterly taxes, I'll send off an enormous check at some point over the summer for about what I paid in taxes the year previous, with my SSN scribbled on it. That's actually surprisingly effective.
Most years, I let it slide and simply tack on an extra 0.4% to my total tax bill in April.
If you're in the US. In other countries, different tax regulations apply.