Transition from W2 to Contractor - what do I need to know?

September 27, 2022 8:41 AM

I am a software engineer based in the US. After decades as a W2 employee, I want to become a contract worker. Please tell me what I need to know so that I cover all the necessary bases. Also I'm hoping you can give me advice on how not to get ripped off.

I've never done any contract work before, so please assume I'm starting from a position of knowing nothing. Some of the questions I have :

- Should I incorporate as a Sole Proprietorship, LLC, or S-Corp? (yes, I have read this question)
- Should I consider using an Employer of Record service instead of incorporating? A friend recommends iprofessional.com — Does anybody know anything about them? Do you know of any competitors? Most of the ones I've found are geared towards companies wanting to hire a remote international workforce.
- A bunch of online companies promise to set up your LLC or S-corp for you. Are any of them worth it?
- What kinds of insurance should I buy to protect myself from possible lawsuits?
- What should I know about taxes?
- What should I know about contracts? Should I hire a lawyer to look over any contract that I might want to take?
- What do contracts usually look like for contract workers in the software industry? Do they usually pay an hourly rate?
- I've heard sometimes clients try to get away without paying. What can I do to protect myself here? And if someone does try to make off without paying, what recourse do I have (realistically speaking)?
- What's the best way to find gigs? Are there any good websites for this? What about the recruiters that reach out to me over linkedin — are they good for finding contract work?
- What are the best online communities for software contractors? Basically, places where I can get advice, ask questions, learn what to watch out for, etc.
- If you've worked as a contractor, what are some other things you wish you knew before becoming a contractor?
- Any other knowledge or advice you wish to impart?

Also, if you have any websites or articles that could help me, please do feel free to post links to them. Thank you!

posted by panama joe to Work & Money (5 answers total)

As someone who just spent 4 years as a contractor:

1. Hire an accountant who specializes in small businesses, and ask them if you should incorporate (they'll probably tell you yes).

2. The accountant should also be able to refer you to someone who can handle the incorporation paperwork. As for whether or not it's worth it, I think it depends on how good you are with paperwork. I wish I'd had someone do it for me but I have ADHD.

3. Your base hourly rate should be roughly equivalent to what your hourly salaried rate worked out to. So if you make $100K as a salary, your current hourly rate is $50 and you should charge $150 as a contractor. This is to allow for administrative time and the uncertainty of contracting vs. salaried employment. (This isn't an answer to the question of whether you should charge hourly, but if you charge by week or project, base your fee on this hourly rate)
posted by lunasol at 10:34 AM on September 27, 2022 [1 favorite]

When you work out your rate, remember that salaried employees get benefits. You don't now that you're a contractor. So adjust your prices accordingly.

You also now are responsible for all your taxes, and you will ultimately pay both the employer and employee contribution to social security, which is iirc 12.4%. So also set your prices with this in mind—and make sure you pay your taxes correctly (which might mean quarterly taxes, if you don't incorporate). Your accountant should be able to help you navigate this but just be aware the tax burden will feel much heavier.
posted by branca at 10:46 AM on September 27, 2022 [1 favorite]

This is honestly a lot of separate questions, and some of the answers depend on what your skill set is because "the software industry" is enormous. When you work as a contractor you need to specialize in something, which could be a language, supporting a certain technology like Salesforce, or experience working with a certain type of customer. The answers to the second half of your questions depend heavily on what you have done so far and what you want to do in the future so more detail on that would lead to more helpful answers.
posted by JZig at 11:47 AM on September 27, 2022 [1 favorite]

Response by poster: Gotcha. Sorry for not providing enough detail.

More about me :
* Software engineer with 15+ years of industry experience
* Computer science degree
* Data engineering specialty. Experience w/ Spark, Snowflake, Hadoop
* Fully conversant in python, SQL, and bash. Can get around in Javascript. Haven't touched Java in a few years, but could pick it up again
* Solid AWS/Cloud experience. Not a full-on devops, but I can get around and DIY various things
* Not limited to any particular industry or vertical — I've worked in a lot of them
posted by panama joe at 12:10 PM on September 27, 2022

Those aren't my areas of expertise but are definitely fairly in demand. I would expect there are some LinkedIn (or facebook/slack/discord) groups specific to data engineering so that might be a good place to look. I don't have anything in particular to suggest about company setup other than to browse through the rest of the older AskMe questions on the topic. When I was first transitioning into contracting I personally found the information here to be more useful than other sites I looked at. Here's my general advice on contracts:

In my experience there are two critical parts to a software consulting contract: intellectual property ownership and payment terms. For IP you need to make sure that it VERY clearly specifies what work is owned by the company vs what is owned by you. Some inexperienced clients sent me contracts that were based on full-time employment agreements. This included language saying they owned "any work associated with client's product" which is way too broad for a contractor and you will need to make them be more specific. I asked a lawyer friend of mine to read over my first contract as a personal favor, but the rest I negotiated myself.

Regarding getting paid, I've never had a client actively try to scam me, but there have been a few that paid me very late. The contracts I've signed have varied widely on this but my standard terms are to charge by the hour, send in detailed invoices every month, and expect to be paid within a month of when the invoice was submitted. Some clients pushed hard to have 60 days to pay me, and a few missed those dates because of "administrative issues". You will definitely have to remind clients to pay you, and you may need to remind them that the contract specifies the timing. This is a more friendly way of threatening to get a lawyer involved, which I haven't had to do yet.
posted by JZig at 10:31 PM on September 27, 2022 [1 favorite]