As a small business owner, I’m spending the day running my business. Invoices, taxes, payments. It’s not that bad, really — As a small business owner, I get to take the afternoon off, and go to the beach then, when the beach will be empty except for a few homeschooling families.
September also marks the end of the summer conference season, where the most common personal question I was asked is probably for information about “going independent.” The questions I get are reasonable: How do you decide if it’s a good time to jump ship, what should I do to prepare, that sort of thing.
Given that I am working on labor day, it seemed appropriate to write a blog post about doing just that: Moving yourself from labor to management by starting your own contracting company.
The Basic Math
Given fifty-two weeks per year to start with and subtracting two weeks for vacations and holidays yields about 2,000 billable hours. That means the $60,000 in salary Joe earns is roughly equivalent to an hourly worker at thirty dollars per hour. The math works amazingly well — divide salary by two and you have an hourly amount.
You’ll notice I said roughly, because independent contractors have to pay both halves of social security which works out to about a 7.5% tax increase. Contractors also generally need to provide their own insurance and retirement – my math puts that at another 12.5%. So you multiply your roughly hourly rate by 1.2 and that tells you the hourly bill rate that would be apples-to-apples payment.
Except it’s not.
Charging for Uncertainty
Regular, full-time employees have an expectation of more work, and, if the work falls through, unemployment benefits. Contractors can expect a six to nine month contract followed by a job search. I am suggesting that, to make the math work, you want to build extra money into your bill rate to fund the time between assignments.
If you can take a guess at how long you’d go between assignments, you are half-way there.
So let’s revisit our would be contractor making $60,000 per year as an employee. A $30/hr job is roughly equivalent, but to cover taxes and fees, he wants to make $36/hr. Assuming the first offer is for a nine-month contract and there are two months between gigs, he needs to make an extra 2/9ths, so:
$36* (2+9)/9 = $44/hr.
To find out “can I go independent”, just go to the market and see if you can find positions paying over $44/hr. If yes, then yes, you can go independent.
There’s More To It Than That
I’ve framed the conversation so far about hard numbers, because it’s an easy, non-emotional start – the kind of place engineers love to work. The thing is, the decision to start your own business is very emotional. Here’s a few examples:
– Do invoicing, marketing, sales and paying bills excite you? Because you won’t be able to bill for them. To hit 2,000 hours a year billable, you’ll mostly be doing those things on nights and weekends. (The alternative is to increase your hourly rate.)
– Does uncertainty excite you or scare you? That question is the kicker. If you can look at a project pipeline and see a big question mark for work coming in two months and still sleep at night — then independence might be for you.
– Can you limit your spending when times get tough? One of my good friends, Adam Yuret, spent three years living on a boat. That means his family had to live cheap, to save up for the boat trip, and then live cheaper, to make the boat trips last as long as possible. A willing ability to adjust your lifestyle doesn’t just make things easier — it also tells you about your priorities.
– If your partner supportive? Most of the long-term contractors I know have a life partner who has a steady paycheck and benefits. They also have a spouse who is emotionally supportive. Going independent will impact both of you; this is a two-person decision. If you are single, seriously consider your support network — who will help you when they have nothing to gain. Many single independents I know have a business partner who does the things they dislike, like sales or book keeping.
– Is working with a new team per year or so super-exciting or odd? Being a contractor, especially one who travels, can make it hard to develop meaningful relationships, or even feel like one of the team members. It means jumping into a great unknown again and losing your system expertise all the time. On the other hand, some people find working on the same system for twenty years to be dull or unsatisfying.
– How will the long game play out? Many companies still strive to provide lifetime work and decent retirement for employees, including retraining when skills become obsolete. Contractors have to work to find projects to stay current technically, or else become known for a very specific technology. As an independent, you’ll want a plan for staying current (which may eat into your 2,000 billable hours) or else a plan for staying marketable as a COBOL programmer. (Don’t laugh, I know a few).
The Final Analysis
Having the raw data on going independent can help make the decision – so go nuts. Here’s the formula –
Desired Salary in Thousands / 2 * 1.2 * Bench = Desired Hourly Rate
Once you’ve got that, you can make some casual questions of a few trusted friends to find out if you are in the right ball park. After that, the decision is personal and emotional, about who you want to be, how you want to invest your work life … and if you have the long-term wherewithal to stay in the game.
Will I see you at the beach tomorrow?
Maybe next year?