🎶Here I go (for the first time) on my own (sorta)🎶
November 30, 2017 11:05 AM Subscribe
I will soon be leaving my full-time job to make a go of it as a consultant. What should I know/do?
I'm leaving my job next month. I have almost 20 years of working experience but have almost always worked as a full-time staff person for an organization. I'm going to take this opportunity to make a go of it as a consultant.
I do already have a few contracts lined up through a friend's boutique agency - and if that goes well, we will explore me joining more permanently. But in the meantime, I'd like to think about how I can set myself up for success in the next few months.
Things I have covered/are already thinking about:
- The going rate for consultants in my line of work is about three times my current hourly wage, which is what I've been told I should go for.
- I have started reaching out to contacts and have been getting favorable responses.
- Between severance and savings, I will have enough saved to cover 3 months of living expenses. Less than ideal, but I believe I can also collect unemployment if necessary (currently confirming that). I know some people would say to wait until I have 6 months saved, but I have no dependents and I'm leaving my job anyway, so this seems like a good time to make a go of this.
Things I'm unsure of:
- Should I keep my current (amazing but expensive) coverage through COBRA or opt for (cheaper but high-deductible) insurance through my state (WA) exchange?
- I should hire an accountant, right? What should I look for in an accountant? I know I need to set aside money for taxes but I've been getting different advice about how much.
- What should I do about my retirement savings? Currently I have money in a 401K. Should I roll it into an IRA? A Roth IRA? I'm in a middle-income tax bracket.
- If this goes well, I'll be looking to buy a house in the next two years. Will it be impossible to get a mortgage as a self-employed person even if I'm earning well?
I would also just love to hear advice from folks who have done this before - what were the surprises, good and bad? What do you wish you'd known or done before you started?
I'm leaving my job next month. I have almost 20 years of working experience but have almost always worked as a full-time staff person for an organization. I'm going to take this opportunity to make a go of it as a consultant.
I do already have a few contracts lined up through a friend's boutique agency - and if that goes well, we will explore me joining more permanently. But in the meantime, I'd like to think about how I can set myself up for success in the next few months.
Things I have covered/are already thinking about:
- The going rate for consultants in my line of work is about three times my current hourly wage, which is what I've been told I should go for.
- I have started reaching out to contacts and have been getting favorable responses.
- Between severance and savings, I will have enough saved to cover 3 months of living expenses. Less than ideal, but I believe I can also collect unemployment if necessary (currently confirming that). I know some people would say to wait until I have 6 months saved, but I have no dependents and I'm leaving my job anyway, so this seems like a good time to make a go of this.
Things I'm unsure of:
- Should I keep my current (amazing but expensive) coverage through COBRA or opt for (cheaper but high-deductible) insurance through my state (WA) exchange?
- I should hire an accountant, right? What should I look for in an accountant? I know I need to set aside money for taxes but I've been getting different advice about how much.
- What should I do about my retirement savings? Currently I have money in a 401K. Should I roll it into an IRA? A Roth IRA? I'm in a middle-income tax bracket.
- If this goes well, I'll be looking to buy a house in the next two years. Will it be impossible to get a mortgage as a self-employed person even if I'm earning well?
I would also just love to hear advice from folks who have done this before - what were the surprises, good and bad? What do you wish you'd known or done before you started?
Best answer: This is pretty much the only topic of the Free Agents podcast. I'm sure you'd benefit from listening to their archive (35 episodes as of now) as the two hosts candidly share the experience each of them had when they transitioned into self-employment.
posted by fjom at 11:26 AM on November 30, 2017 [2 favorites]
posted by fjom at 11:26 AM on November 30, 2017 [2 favorites]
Best answer: Should I keep my current (amazing but expensive) coverage through COBRA or opt for (cheaper but high-deductible) insurance through my state (WA) exchange?
Unless you have medical needs that justify keeping the higher cost plan, you're probably better off with the cheap one.
I should hire an accountant, right? What should I look for in an accountant? I know I need to set aside money for taxes but I've been getting different advice about how much.
If you're going to be heavily itemizing costs, it's probably worth it to have someone experienced do it for you. If you're going to keep things simple, you can do it yourself. You need to pay estimated taxes quarterly or you'll get hit with a fine. It's your normal taxes plus 15.3% self employment tax. There's a ceiling for that but it doesn't sound like you'll hit it.
Will it be impossible to get a mortgage as a self-employed person even if I'm earning well?
You'll need at least a year's worth of demonstrable income including at least one year's tax filing.
What should I do about my retirement savings? Currently I have money in a 401K. Should I roll it into an IRA? A Roth IRA? I'm in a middle-income tax bracket.
If you have a good IRA and they're not kicking you off of it, there's no need to move it out of the 401(k). Chances are you can do better as far as fund choice and cost if you move it to an IRA though. I would not roll it into a Roth now because the conversion taxes would eat up funds you need to get through the first year of being your own boss.
The only reason why you might not want to roll it into an IRA is iff [sic] you think it's likely that you would ever return to the same employer or work for one that does allow you to roll an existing 401(k) into theirs and you think it's likely that you'd take a loan out from it that would need that money. That's a pretty extreme edge cast though.
As a self-employed person, you have new options for plans going forward.
What do you wish you'd known or done before you started?
Unless you're lucky and in a high demand industry, expect to spend more time chasing leads and not working than you'd like, especially at first. But that's part of where that 3x normal rate comes in. Budget and save assuming lean times will come at some point.
Depending on your industry, blogging, writing articles, being active on social media, and speaking at conferences can boost your reputation and create leads. If you can find someone that will pay you to write articles for them, that's an excellent use of downtime.
Consider getting short term disability insurance.
Get some kind of invoicing software/service.
If you are planning on itemizing costs, get in the habit of saving documentation of everything when you get it into the cloud and make an offline backup of it periodically. The same thing goes for all your business files - back them up religiously, and periodically restore the backups so you can be certain that your process is working correctly.
posted by Candleman at 11:40 AM on November 30, 2017
Unless you have medical needs that justify keeping the higher cost plan, you're probably better off with the cheap one.
I should hire an accountant, right? What should I look for in an accountant? I know I need to set aside money for taxes but I've been getting different advice about how much.
If you're going to be heavily itemizing costs, it's probably worth it to have someone experienced do it for you. If you're going to keep things simple, you can do it yourself. You need to pay estimated taxes quarterly or you'll get hit with a fine. It's your normal taxes plus 15.3% self employment tax. There's a ceiling for that but it doesn't sound like you'll hit it.
Will it be impossible to get a mortgage as a self-employed person even if I'm earning well?
You'll need at least a year's worth of demonstrable income including at least one year's tax filing.
What should I do about my retirement savings? Currently I have money in a 401K. Should I roll it into an IRA? A Roth IRA? I'm in a middle-income tax bracket.
If you have a good IRA and they're not kicking you off of it, there's no need to move it out of the 401(k). Chances are you can do better as far as fund choice and cost if you move it to an IRA though. I would not roll it into a Roth now because the conversion taxes would eat up funds you need to get through the first year of being your own boss.
The only reason why you might not want to roll it into an IRA is iff [sic] you think it's likely that you would ever return to the same employer or work for one that does allow you to roll an existing 401(k) into theirs and you think it's likely that you'd take a loan out from it that would need that money. That's a pretty extreme edge cast though.
As a self-employed person, you have new options for plans going forward.
What do you wish you'd known or done before you started?
Unless you're lucky and in a high demand industry, expect to spend more time chasing leads and not working than you'd like, especially at first. But that's part of where that 3x normal rate comes in. Budget and save assuming lean times will come at some point.
Depending on your industry, blogging, writing articles, being active on social media, and speaking at conferences can boost your reputation and create leads. If you can find someone that will pay you to write articles for them, that's an excellent use of downtime.
Consider getting short term disability insurance.
Get some kind of invoicing software/service.
If you are planning on itemizing costs, get in the habit of saving documentation of everything when you get it into the cloud and make an offline backup of it periodically. The same thing goes for all your business files - back them up religiously, and periodically restore the backups so you can be certain that your process is working correctly.
posted by Candleman at 11:40 AM on November 30, 2017
Best answer: - My back of envelope calculations are to presume I will be tossing 25% of my income towards taxes so I allocate accordingly. See if you need to make quarterly tax payments (yes, an accountant can help with that)
- Start tracking expenses NOW so you're in the habit. Understand how self employed money works. You basically pay taxes on what you earn minus your expenses (this is hand-wavey) and things like charitable contributions, IRA contributions, HSA contributions if you have a high deductible health plan etc. An accountant can help you make smart decisions about that.
- I'd leave the 401K as-is, though you could roll it over to something owned by another company if you wanted to put all your money in one place (I did this, it's paperwork but not too tough)
- Assume you'll be spending at least 25% of your time hustling up work. This can be promotions, advertising, networking, whatever. It may not be a bad idea to incentivize early customers to do work with you because having a few good customers and a solid customer base will really help you get new customers.
posted by jessamyn at 12:06 PM on November 30, 2017
- Start tracking expenses NOW so you're in the habit. Understand how self employed money works. You basically pay taxes on what you earn minus your expenses (this is hand-wavey) and things like charitable contributions, IRA contributions, HSA contributions if you have a high deductible health plan etc. An accountant can help you make smart decisions about that.
- I'd leave the 401K as-is, though you could roll it over to something owned by another company if you wanted to put all your money in one place (I did this, it's paperwork but not too tough)
- Assume you'll be spending at least 25% of your time hustling up work. This can be promotions, advertising, networking, whatever. It may not be a bad idea to incentivize early customers to do work with you because having a few good customers and a solid customer base will really help you get new customers.
posted by jessamyn at 12:06 PM on November 30, 2017
Unless you're lucky and in a high demand industry, expect to spend more time chasing leads and not working than you'd like, especially at first. But that's part of where that 3x normal rate comes in. Budget and save assuming lean times will come at some point.
I came to say this, and I am in a high demand industry. I only consult part time these days but even a gift-wrapped new client can come with many hours of unpaid work upfront. (introduction calls, emails, scoping out projects, lining up terms and NDAs etc)
Spend money like you earn 1/3rd that income. When I consulted full time I had wild feast and famine, earn 6 figures on one quarter long project, then earn that same amount in the following 18 months.
posted by French Fry at 12:12 PM on November 30, 2017 [3 favorites]
I came to say this, and I am in a high demand industry. I only consult part time these days but even a gift-wrapped new client can come with many hours of unpaid work upfront. (introduction calls, emails, scoping out projects, lining up terms and NDAs etc)
Spend money like you earn 1/3rd that income. When I consulted full time I had wild feast and famine, earn 6 figures on one quarter long project, then earn that same amount in the following 18 months.
posted by French Fry at 12:12 PM on November 30, 2017 [3 favorites]
Things I wish I'd known -
posted by paduasoy at 12:16 PM on November 30, 2017
- Marketing is really, really, incredibly hard. I got lots of work through the contacts I had at the start, but haven't been able to make new contacts and my previous contacts are starting to retire.
- Looking for contracts through agencies has been deeply frustrating - I've put lots of time into talking to them about opportunities which don't materialise.
- Organisations who need consultants - at least in my industry - are likely to be ones with problems so may be difficult to work with (poor communication etc).
- Self-funding training courses.
posted by paduasoy at 12:16 PM on November 30, 2017
Things I learned the hard way:
- Never rely on a single point of contact within a client company. Always meet and build relationships with other decision-makers so if your first contact person leaves the company you will probably get to keep the client.
- Use some sort of accounting software (Quickbooks or the like) right out of the gate. It's much easier than trying to recreate the past 18 months of your business life.
- Underpromise and overdeliver. Always do what you'll say you'll do, when you say you'll do it. Companies are, understandably, a little reluctant to work with a solitary consultant. But if you routinely meet or beat your deadlines, you'll earn their trust.
- Look like a much bigger company than you are. Create a nice logo and letterhead, issue invoices correctly and on time, make sure there are no non-office sounds in the background when you're on the phone, and always act professionally. Your clients are your clients, not your friends.
- Target some companies you'd like to have as clients and reach out to them. It's good marketing practice, keeps you from going crazy waiting for the phone to ring, and may just produce a client or two.
- If at all possible, establish ongoing consulting relationships with your clients so you don't have to market for each and every piece of work you do.
- Be patient. New clients always seem to come in clumps, usually a few days after you've pretty much given up.
posted by DrGail at 2:25 PM on November 30, 2017 [4 favorites]
- Never rely on a single point of contact within a client company. Always meet and build relationships with other decision-makers so if your first contact person leaves the company you will probably get to keep the client.
- Use some sort of accounting software (Quickbooks or the like) right out of the gate. It's much easier than trying to recreate the past 18 months of your business life.
- Underpromise and overdeliver. Always do what you'll say you'll do, when you say you'll do it. Companies are, understandably, a little reluctant to work with a solitary consultant. But if you routinely meet or beat your deadlines, you'll earn their trust.
- Look like a much bigger company than you are. Create a nice logo and letterhead, issue invoices correctly and on time, make sure there are no non-office sounds in the background when you're on the phone, and always act professionally. Your clients are your clients, not your friends.
- Target some companies you'd like to have as clients and reach out to them. It's good marketing practice, keeps you from going crazy waiting for the phone to ring, and may just produce a client or two.
- If at all possible, establish ongoing consulting relationships with your clients so you don't have to market for each and every piece of work you do.
- Be patient. New clients always seem to come in clumps, usually a few days after you've pretty much given up.
posted by DrGail at 2:25 PM on November 30, 2017 [4 favorites]
Best answer: On the retirement front, you could look into a Solo 401k or SEP IRA. My understanding is you can put more into a Solo 401k, but it has to be opened before the end of the year prior to filing taxes. A SEP IRA can be opened up to the tax filing date.
Keeping track of expenses is really important for taxes, and I would scan every receipt and invoice as they're generated. There are apps that you can use to scan all your stuff and it will categorize them for you. I used an app called MileIQ to help keep track of miles driven as tax deductions. I would set aside about 20% of your income toward taxes and file quarterly to avoid fines.
posted by madonna of the unloved at 3:29 AM on December 1, 2017
Keeping track of expenses is really important for taxes, and I would scan every receipt and invoice as they're generated. There are apps that you can use to scan all your stuff and it will categorize them for you. I used an app called MileIQ to help keep track of miles driven as tax deductions. I would set aside about 20% of your income toward taxes and file quarterly to avoid fines.
posted by madonna of the unloved at 3:29 AM on December 1, 2017
Response by poster: Thanks, all! I marked as "best answer" comments that gave me information I didn't already have, but all of these comments were really helpful!
posted by lunasol at 3:08 PM on December 15, 2017
posted by lunasol at 3:08 PM on December 15, 2017
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Home-buying: Have good credit, a sizable savings account, steady income, and you shouldn't have a problem getting a mortgage loan as a self-employed person, although you may not qualify for the very lowest interest rates.
posted by erst at 11:10 AM on November 30, 2017