How does one move from employee to independent contractor intelligently?
November 12, 2012 9:26 PM   Subscribe

My husband is a computer programmer and is considering moving to independent contracting. We are researching the idea. I normally do well with Google, but I'm failing this time. Please help?

My husband is currently an ETL (IT) programmer with a medium sized company that hires contractors on occasion. He has a good relationship with his immediate boss and team, but has some issues with the overall job structure. The main complaints are office politics and that his team has shrunk from six programmers to two with no reduction in work over the last year and a half.

He's made the decision to quit with my blessing*, and he let his manager know today that his last day would be the end of the year. She immediately asked if he'd consider consulting on a per-project basis, as he has some specialized knowledge that is not easily replaced.

He is considering the idea - he enjoys what he does and believes working on a per-project basis would reduce many of the stresses the job currently has for him. For instance, he's currently working on six projects. If he were an independent contractor, he could accept just one project and work on it to completion, instead of juggling 5-6 project simultaneously. The work is easily broken out into 2-3 month projects and he'd be able to work from home, which is a big plus for him (he's a strong introvert).

We've done the research and have a fairly decent grasp of the tax implications. The plan, should he decide to go the independent contracting route, is to set up an LLC and have a small business contracts lawyer review the planned "standard contract" and/or any contracts offered by the business to my husband to ensure that he adequately understands to what he's agreeing to do. I've found plenty of info on how to file quarterly estimates and on what does and does not count for business expenses. What I cannot find, and what we'd both like to understand, are some of the potential pitfalls of moving from an employee to an independent contractor, especially when you will be working (at least at first) for your old company. I've tried about every Google search and MetaFilter search I can think of, and can't find anything, and he's in the same boat. Any resources, books, websites, personal anecdotes, etc about making the transition from employee to independent contractor as a programmer are greatly appreciated. We're in the U.S. in Michigan, if that makes a difference.

* We have been discussing his leaving this position for the last year or so. We've been living comfortably on my income in that time, and used his income to pay off our debt and save up a 6 month cushion. My job is very, very stable and I love it, so we're in a good position for him to take some time off or explore this independent contracting idea. We have no kids and no mortgage, so our risks are fairly minimal, all things considered. He'll be covered under my health insurance through my job.
posted by RogueTech to Work & Money (10 answers total) 8 users marked this as a favorite
"what we'd both like to understand, are some of the potential pitfalls of moving from an employee to an independent contractor, especially when you will be working (at least at first) for your old company."

How certain is he that this will happen? The company could have policies of their own creation or due to labor laws that dictate whether or for how long they could employ your husband as a contractor. Can you find out for sure?

If he can't secure contract employment with his current employer, what are the obstacles to getting an opportunity with another company?
posted by germdisco at 9:42 PM on November 12, 2012

It's important to note that, in almost all situations I know of in the U.S., "contracting" is a term of art for being a W2 temporary employee or 1099/Corp-to-corp independent contractor.

There is no "contract" in the sense that the employer is obligated to pay a certain amount for a preset amount of work. The employment is still "at-will" and can be terminated at literally any time, for any reason at all (that doesn't violate the law).

In fact, being a "contractor" in programming can be almost identical to being a full-time employee, depending on the situation. Same cubicle, same meetings, same politics. Everything the same except maybe a higher rate, offset by no sick or vacation days and no benefits. It sounds like if he works with his current employer there may be some changes from the status quo, but not every job will be like that.
posted by drjimmy11 at 9:54 PM on November 12, 2012

I realize I should have been more clear in my question. The current projects are along the lines of, "Complete the programming for this ETL program, the project starts March 1 and is delivered on July 31". The proposal is to contract with Mr. RogueTech to have him take on extra projects when they have them. He would have the ability to say yes or no to specific projects, or to not take any of the projects. The company would, of course, have the right to not offer him any projects if they so choose.

We're not 100% certain this will happen. We are still exploring the idea, and there's a lot of hoops his current boss would need to go through to get the arrangement approved. The contractors he's known of there have been retained for years, and work anywhere from full time to once a year on one project. Occasionally the company will decide to dump all their contractors for a couple months, then hire them all back on.

There are no current obstacles to getting another opportunity with another company - he does have a couple resumes out now, but with the holidays there's no guarantee that he'll find another position before he leaves this company.

Another way to phrase it, I guess, is: They're offering him to work on a project to project basis, basically part time, in an ideal situation that they weren't willing to give him as an employee, and the contracting rate would basically work out to the same or larger take home pay. Given that he'll have no benefits through them, but still - it sounds too good to be true, so we're trying to figure out all the stupid traps and pitfalls that he could fall into, that maybe more knowledgeable people have either already fallen into or could yell, "IT'S A TRAP!" Everything I've found so far says things really could work out that well, but ... my spidey-sense is tingling.
posted by RogueTech at 10:28 PM on November 12, 2012

Can he position himself in an "advisory" role where he sells blocks of time (40-120 hours per year) to be requested at any time at say, at 200 to 250 dollars an hour?
posted by roboton666 at 10:30 PM on November 12, 2012

The idea is that you sell that block to up to 10 companies at 100 hours each for 250 an hour to equal 250 thousand per year revenue. Go down from there.

(yeah, it sounds ridiculous on the face, but after taxes, retirement planning, insurance and everything else, it gets rounded down to a decent living of maybe 140 thousand dollars per year)
posted by roboton666 at 10:37 PM on November 12, 2012 [1 favorite]

I want to say also, starting out, you need to assume 6-12 months loss of income while he builds up business.

The only way this idea will work is to scale it out across a minimum of 5 clients. That will put you at about 70 thousand per year to put towards your yearly living expenses. (which, depending on where you live may or may not be ok)

Set a goal. If after one year he doesn't have 6 or more clients, cut bait and make him re-enter the "w-2" workforce.
posted by roboton666 at 10:45 PM on November 12, 2012 [2 favorites]

I'm a permanent employee with a large company, but I work with a lot of independent ETL contractors and these are the things they've mentioned about contracting vs. permanent:

- A lot of them began as permanent employees with some company or another and then moved to contracting for a variety of reasons, so this is quite common.

- When negotiating your hourly rate, you need to factor in sick days and annual leave - so your rate should be based on working 5x52 working days + [however many leave days you plan to take].

- you have to pay into your own retirement fund, whatever it is in the US. (I'm ashamed to admit I have been reading MeFi for years and still am not quite sure what it is.)

- Expect the position at the old company to be a temporary, this-project-needs-to-be-finished-and-it-would-be-too-costly-to-train-a-replacement type thing. Especially as he's immediately moving to a position with his current company.

- if contracting is to be a long-term thing - as in, he's not planning to pursue a permanent job elsewhere - gaining contracts will depend greatly on personal contacts in the IT industry. If he doesn't want to play that game, it might not be such a good idea.
posted by Xany at 2:45 AM on November 13, 2012 [1 favorite]

He should not assume that setting up an LLC means that there are no liability concerns. "Limited liability" means only that he would not have personal liability for the acts of others - employees, other members. He will always have personal liability for his own errors, regardless of how the business is organized. Hence, insurance to cover errors and omissions is essential.
posted by yclipse at 4:53 AM on November 13, 2012 [1 favorite]

ETL contractors are highly in demand. The biggest risk, as I see it, is that your husband will be underpaid or maltreated due to a lack of understanding of the marketplace.

What your husband needs is a mentor to help get him up and running. If he is on the Microsoft stack he should try his local SQL PASS chapter, other DBs have other user groups.
posted by crazycanuck at 7:28 AM on November 13, 2012

I work in ETL 'space'. Yes, incredibly high demand.

I'd recommend him looking into consulting companies (full disclosure: I work for one), though his extreme introversion may hurt him there. I work as many hours that my consulting company has contracted for (this is 40 hours a week), so if I have to work on 20 different projects, I'll have to push out timelines. If he's open for travel (monday-thursday), company pays, his options are even larger.

However there are consulting companies that are more like contracting companies (they don't pay salary, they really just handle taxes, paperwork, finding projects, etc). Almost all contractors I know work through this system.

One thing to know, ETL contracting is swamped with H1Bs and those working for Indian companies and paying employees at sub-market rate. Typically those with good English-speaking skills (or even US citizen) are looked at almost automatically as all-stars, subtly racist or not.

I'd recommend him taking a look at Dice as a start-- me mail me for questions.
posted by sandmanwv at 8:16 AM on November 13, 2012

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