Moving from regular employee to contractor

May 28, 2010 2:49 PM

The short: I've been laid off, but the company wants me to come back as a contractor to finish up a few projects. And I want to finish them. How much money do I ask for as a contractor? Of course, the details are inside.

I've been laid off. Mostly.
I've been here for just over nine years. The company has been struggling for quite a while, and was purchased a year ago. The new owner has put into place a firm headcount limit. While it's unrealistic for our current needs, the line in the sand has been drawn and none of the senior execs dare cross it. So, the workaround consists of laying people off and then bringing them back as contractors, since they then do not count against the headcount limit.

This certainly isn't a wise long-term strategy for anyone, but it is the position I now find myself in. I've been laid off (the layoff date is a week or three in the future), and offered a position as a contractor.

My question:
How do I know a fair rate to ask for as a contractor?

My data:
-Let's say my salary is about 55K.
-My paycheck (every two weeks) lists my "rate" as $2070, I usually see about $1460 +/- $5 as takehome pay on a paycheck.
-I'm in Portland, Oregon
-I have excellent health benefits that cover myself and my wife (who does not currently have the option for health insurance through her employer).
-This is likely a temporary contract (1-3 months)
-I'm losing about four weeks of vacation/sick time (we combine it all and call it PTO) in the layoff, this is not included in my otherwise very generous severance package, which does include four months worth of COBRA payments.
-I have two options as a contractor. Invoice the company myself and stay fully independent (and then have to deal with taxes, etc.), or work through an agency that takes care of all the withholding, etc. I think I prefer the agency route for the sake of simplicity and the possibility of other jobs in the future.
-my contract will likely be an hourly rate, not a salary.
-I think my current rate, if broken down to hourly, (and assuming I only work 40 hours a week... Ha!) looks to be $26ish.

What do I ask for; $30, $35, $40, $45, $50 - more?
Is there a good formula or rule of thumb that I'm missing?

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posted by anonymous to work & money (17 answers total)

I'd say about 150% of what you made as a salaried employee. $40.
posted by nathancaswell at 2:53 PM on May 28, 2010

To clarify... 150% is the low end of what I'd ask for.
posted by nathancaswell at 2:54 PM on May 28, 2010 [1 favorite]

The rule of thumb I've always used in the IT industry is double the hourly rate you got as a full-time employee.

If you're American, you might want to add a few more percent if you have health-care costs.
posted by blue_beetle at 2:59 PM on May 28, 2010 [2 favorites]

Double at a minimum, and more wouldn't be out of line. There's a whole shitpile of benefits you don't get, and a whole lot of extra paperwork you do get, plus some extra tax burden, and the whole healthcare stuff, and the "don't come in tomorrow" thing. I'd toss an extra 50% on the fire for a "you fucking fired me what the fuck?" bonus.
posted by seanmpuckett at 3:07 PM on May 28, 2010 [8 favorites]

Can you check with some of the other former-employees-now-contractors? If they don't want to give you numbers they can at least say what multiplier they gave to their hourly rate.

You are losing paid sick-leave, vacation, any degree of stability, and you now have to pay more social security/fica. I agree with nathancaswell that 150% is the minimum you should consider and that probably means you should pick more if you are going through an agency, because they will take their cut.
posted by It's Never Lurgi at 3:07 PM on May 28, 2010

Most body shop agencies take care of more than withholding and billing. They also help themselves to 40%-60% of what they bill your former company. What these firms do is aggregate lots of demand - everyone knows to call them when they need a contract position filled. So they're definitely useful when you can't find work on your own. But that's not the case here. You've found the work for yourself. Withholding and filing the proper taxes is easy. Just Google "filing taxes as a contractor" or "filing taxes self-employed." And the contracting agency will be happy to work with you in the future. Having a large stable of potential contractor is what they do.

In terms of rate, it would have helped if you posted the type of work you're doing or how long you've been doing it. But since we don't know that, I think you should go for at least $50/hr.

As a side note, I was astonished to learn that Oregon doesn't require employers to pay the employee for earned vacation/sick time when they lay them off.
posted by centerweight at 3:16 PM on May 28, 2010

My gut feeling is also 200% of your list rate. You still have to pay taxes and all that good stuff, plus as a contractor you have to factor in the months between jobs (or in your case, till you get a new one).
posted by sbutler at 3:19 PM on May 28, 2010

That number seems waaaay too low, but I'll let someone else respond to that (remember, no more holiday pay, vacation pay, how are you going to find new client pay, etc.).

I'm here to give a different suggestion: Don't go through the agency! Agencies usually have you sign that you will not go to a competitor or other clients. Plus they will take a healthy cut out of your pay.

Yes, it will be more complicated, but go register soon as a busines (s-corps, sole proprietor IANAL) and open a business accout at a bank. There are online services such as Intuit payroll that can calculate how much goes to taxes and how much goes to you. The first few months it is free. Then it is $10/month (half price) and eventually $20. This does not = the hourly bite out of your pay that an agency will take. Trust me it takes the headache away and tells you when you owe, etc.

I would also start googling competitor companies (go to your library and see if they have lists - there are books with lists and online lists). Start emailing companies and introduce yourself and offer your services. You may be surprised to find that this can be preferable to working fulltime - if you get offered a few projects at once you pick the one that is more interesting.

My forumula is 2 to 3 times hourly - that is what I've been using and most clients don't blink.
posted by Wolfster at 3:22 PM on May 28, 2010

The rule of thumb I've always used in the IT industry is double the hourly rate you got as a full-time employee

I've heard the same rule of thumb, except that it was a rule of thumb for what the company is probably spending on you— 50% salary, 50% benefits / office space / perqs / other overhead.
posted by hattifattener at 3:30 PM on May 28, 2010

Start by asking for triple your current hourly rate, but be willing to drop it down to double if they flinch. And that's triple your gross income, not triple your take-home pay!

Don't go through an agency if you can possibly help it. They will take fees, and dick you around, and can make your life a real misery.
posted by ErikaB at 3:36 PM on May 28, 2010

If dealing with the taxes seems like an incredible hassle, I bet you would still save a lot of money over an agency by having an accountant do everything for you. You should probably talk to an accountant anyway; there may be all sorts of business expenses that you can deduct from your taxes.
posted by grouse at 3:47 PM on May 28, 2010

All good advice. I strongly endorse going fully independent - it's simple to file a DBA ("doing business as") form initially, and go for s-corp later if you find you like contracting. Definitely hire an accountant; that takes out almost all of the hassle and is not too expensive. Mine handles all the withholding etc. and files the quarterly and annual returns for me.

Setting rates is hard, but go for the high end of the above suggestions. You are in a great position: the company needs and wants you, you have unique knowledge and expertise specific to this company, and you'll be productive immediately with no training. A bargain at any price. If they say your initial offer is too high, you can offer a concession - but be sure to couple it to some reduction in services that you know will be acceptable. (OK, I can drop my rate to X, but at that rate I won't be able to do Y [naming a service or a part of the project that you know is not critical anyway].)

Good luck and best wishes! This is pretty much exactly how I started my own business many years ago and I'd never go back to being an employee again. The company that laid me off asked me to rejoin six months later and I happily declined. Life is good when you're the boss.
posted by evilmomlady at 4:18 PM on May 28, 2010

I'm also in Portland. First, they should have to pay you for PTO there are very few exceptions. Secondly, I agree with the 2x + a little when converting from salary to contract, but when we let a bunch of people go last year the few that got to come back on contract got the hourly equivalent of their salary and lost all benefits.

At the time they were grateful to have any employment; if your employer is truly trying to cut costs and the market is tough you may just have to take what they offer.
posted by IronSurfer at 6:19 PM on May 28, 2010

In defense of going through an agency, note that there are multiple types: employment agencies with charge a large percentage to find you work (which is pure gravy as you're bringing them the contract for free) and portable employers of record (PER) which take a much smaller percent to cover the paperwork costs.

I had a really great experience working as an independent contractor for over a year in this fashion -- I found the work, the PER handled the backend, and I got fabulous benefits like immediate tax free payments of every business expense and a magical 401(k).
posted by khedron at 8:51 PM on May 28, 2010

$55K? $55/hr.
posted by rhizome at 11:28 PM on May 28, 2010

Seconding rhizome. I've always heard your hourly rate is your yearly salary / hr.
posted by defcom1 at 7:59 PM on May 30, 2010

Interestingly, the two rules of thumb are exactly the same, numerically: if I work 40 hours/week for 50 weeks/year, that's 2000 hours; every $/hour I charge hourly works out to 2k$/year salaried.
posted by hattifattener at 9:12 PM on May 30, 2010