Should I freelance or go on staff?
April 11, 2006 8:43 AM   Subscribe

Is there a rule of thumb about freelance rates vs. staff salaries?

I've been freelancing full-time at the same company for awhile now. The company has just offered me the choice to take a staff position or remain freelancing pretty much indefinitely. On staff, I'd get two weeks' paid time off (this is in the US, as though you had to ask), a 50% 401K contribution match, and health insurance.

The only catch is that they'd drop my salary from $55K to $40K. I'm having a hard time figuring the math here. I know staff salaries are lower than freelance rates, but this seems drastic. Is there a general number used to figure out how much one's salary should reasonably decrease in these situations? Is there any financial reason for me not to remain a freelancer?
posted by catesbie to Work & Money (22 answers total)
A few things:

1) Your health insurance probably costs the company almost 4k per year, so that's a big expense for them.

2) The company also pays additional payroll taxes equivalent to 7.5% of your salary when you are an employee-- this is money that you do pay in your taxes if you are an independent contractor. This is all the long-term social security and medicare tax stuff.

3) In addition to the vacation do you also get paid sick time?

I've seen all sorts of variables in this, but the numbers you're describing sound abut right considering these variables and the additional costs the company incurs putting you on payroll. They also pay unemployment insurance for employees and not freelancers. Of course, all this info is from the company perspective and not yours. If you want your freedom, don't need the health insurance, and don't care about paid time off or plan to donate to the 401(k), I'd stick with being a freelancer.
posted by miss tea at 8:52 AM on April 11, 2006

I think it might depend on what you do. My husband charges double for freelancing, in essence, though he uses an hourly rate for that. And he gets a pretty good salary as an employee.
posted by moira at 8:57 AM on April 11, 2006

That doesn't seem like much of a drop at all. Generally contractors should be making 2-3X a saleried rate to cover overhead, uncertianty, vacation, insurance, employment and pension payments, etc. etc.
posted by Mitheral at 9:00 AM on April 11, 2006

Response by poster: I'm a one-woman video editing shop. This company has been my full-time gig for over a year now, so the uncertainty isn't much of an issue as it would be if I were really working from home and shopping my services around all the time. In essence, I'm already on staff. I just have to buy my own health insurance and pay for any time I want off.

Is 7.5% the only tax difference between self-employment and being someone's employee? Obviously if I'm self-employed I can write off all my movie tickets, etc., but as long as I'm doing a little bit of freelance work, I can still claim them, right? Is there any other tax figure I should be taking into account?
posted by catesbie at 9:11 AM on April 11, 2006

My organization calculates benefits at 17-20%, which is very high (and one of the reasons I stay with my job while freelancing on the side). I've seen other businesses calculate at 10-15% of total salary; in your case 15% of 55K is $8,250 and the drop to 40K does seem drastic, but I'd ask how they're making up the 15K.
posted by hamster at 9:16 AM on April 11, 2006

Well you should be less concerned with how they came up with their number than how the change in status impacts your numbers. As Miss tea mentions, if their salary to you is 40k vs 55k you need to compare it as 40k * 1.075 or 43k since you're currently paying both sides of the SS tax.

The 401k access is a HUGE thing IF you will take advantage of it. How high will that 50% match go? Some companies will only match up to some amount. Will they match up to the 15k contribution limit? How high WILL you go?

Also, as a freelancer are you currently writing off any business expenses? If you are that's a notable impact since you effectively write off expenses from your top tax rate, not your bottom. In 2006 and at your salary that's 25 or 15% if you're single and at your current compensation rate.

Finally, health insurance. Do you have it now? (if not, shame!) Will they offer it? How much will it cost you there vs now?

From a purely monetary stance I'd negotiate a little harder. When I helped with grant proposals we assumed actual cost for a body on a project was 130% of their annual salary. Applying that here you get 52k although in fairness, that was in 94 and health care costs are higher.
posted by phearlez at 9:19 AM on April 11, 2006

If you were looking to grow your business that's one thing, but if you're a contractor who works full-time for a single client, you're almost always better off being on staff.

You need to look at this from more than just the money angle. Companies almost never let someone "remain freelancing pretty much indefinitely". If you are a freelancer, they can cut you off pretty much at will, with no termination benefits. As a full-time employee, you're much more secure, and you get unemployment benefits if they let you go.
posted by mkultra at 9:20 AM on April 11, 2006

Obviously if I'm self-employed I can write off all my movie tickets, etc

Wow I really hope you're just having a hyperbole moment here and not serious. There's no savings that's worth the penalties you're going to face if the IRS ever calls you on this and demands receipts.
posted by phearlez at 9:21 AM on April 11, 2006

For the sake of your comparisons and computations...

Your employer in Philly starts with a rate of 3.5% for unemployment compensation insurance and it may be adjusted up or down depending on claims.

The 2006 Federal Tax schedule
will show you what kind of rates you're paying on your taxes and will help you determine the impact to your bottom line with regards to deductions.
posted by phearlez at 9:27 AM on April 11, 2006

Response by poster: You guys are fabulous. This is all tremendous. Thanks so much!

(Actually, phearlez, the tax-deductions thing was not hyperbole. Should it be? I always assumed it was fair to study one's craft and write off the expenses, no? Do you know something I don't?)
posted by catesbie at 9:47 AM on April 11, 2006

What are you worth to the company? My rule of thumb is that the total cost (taxes, benefits, etc) the company is about 1.5x your wage. If they are offering you $40k, you will probably cost them $60k, which isn't much different from the costs (fees + admin) of using you as a free-lancer. My guess is that they are pleased with your work and want to "buy" your full-time availability. Since you are already a successful freelancer, there is little downside to you--but be wary of non-competes ....
posted by GarageWine at 10:08 AM on April 11, 2006

I tend to take the angle that this isn't that steep a difference really, and if I were you I'd start wondering if I were charging too little for my freelance services! But, given your situation, I'd consider what phearlez and mkultra are saying about how this affects your money situation and stability.
posted by furiousthought at 10:44 AM on April 11, 2006

I assume this is a fair derail since it was asked by the poster.

While continuing education is certainly within the bounds of deductible expenses, I personally use the IRS's attitude about home offices to inform my belief as to what they'd call bullshit on if I'm ever audited.

"You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:" (emphasis mine)

If your desk is in the corner of your living room and your family also sits and reads there that is not exclusive use. When your employer provides a dedicated workspace for you and the majority of time you work for them you are there it undercuts the 'regularly' qualifier and they have ruled against people in the past.

Similarly - and this is my attitude, NOT official word from the IRS - going to see "Brokeback Mountain" may educate you about cinematography to some extend but can you really claim that is the exclusive and primary reason you're there? The letter of the law is spelled out over here and while it does claim you can split things by percentage, my personal feeling is that the hassle of an audit and the potential expenses of back taxes + interest + possible penalty isn't worth questionable deductions.

For a movie in particular the IRS is very persnickity. Entertainment is discussed at length over here and they have this to say

"Entertainment facilities. Generally, you cannot deduct any expense for the use of an entertainment facility. This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection.

An entertainment facility is any property you own, rent, or use for entertainment. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort." (emphasis mine)

There's continued discussion on that document about entertainment situations that would preclude interaction and a movie would qualify, so you can't pass it off as something you took a client to.
posted by phearlez at 11:31 AM on April 11, 2006

OK, not to derail too much, but going to a movie is not "rental" of an entertainment facility. You can absolutely write off going to movies if you are a filmmaker or video editor. I have a friend who is a music journalist and she writes off all her cover charges, even when they are for bands she is not directly covering--- because part of her job requirements include knowledge of the overall music scene. Your writeoffs would be an analogue.
posted by miss tea at 11:38 AM on April 11, 2006

Response by poster: So I've been crunching numbers for a bit, and I confess I'm a bit shocked by what self-employment is costing me in taxes! I always thought I had a good grip on all this stuff, but after estimating what I'd owe the city, the state, and the feds in taxes in both situations, the difference in net income is close to negligible.

Sorry about the taxation derail above - but this is all really helping me to get my head around the possibilities here.

Oh, and furiousthought, I'm most definitely below market rate for what I'm doing, but I haven't been doing this all that long. There are probably some more experienced editor MeFites around here who would laugh at my current day rate. Alas, someday...
posted by catesbie at 12:09 PM on April 11, 2006

I did a bad highlight job. The IRS includes use of a tennis court and bowling alley in that rental - their definition of the rental of a facility is very wide-ranging. That quote was just one bit out of a long document. I encourage you to read it.

Putting aside the fact that attending shows is more obviously related to being a music journalist than going to movies is for a video editor (the first is necessary to do the job, the second is at best continuing education), as far as what she writes off, that's meaningless until such a time as she had to defend it to an auditor. You can write off your pedicure, bus fare, birdseed purchase and the quarter you give a bum on the street. Outside of an audit they never see a single bit of documentary paper. It's even a joke among tax preparers: "You only really need the receipt if you get audited." You need to manage your deductions with an eye not to what meets the most generous definition but what's going to stand up.

As a practical matter just for the sake of filing you can just pull a number straight out of your ass and write it down. There's even a pretty good chance you will never be called upon to explain it and the only people you will ever have to account to is your inner Jiminy Cricket and your deity.

However you should consider the Risk:Reward ratio. Original poster has an income that places her expenses in the 25% bracket. So the reward for writing off that $9 movie is saving $2.25 in taxes. If you're going once a week that's $117 for the year.

If you're subsequently audited and they decide that you were just misguided they're going to demand an additional 20% in addition to the unpaid taxes. If they decide you were being fraudulent it's 75%. None of this considers interest and the big thing it doesn't consider is how the auditor will subsequently view the bigger picture. Is that $117 worth a possible $204.75? Is it worth making the auditor so skeptical they disallow even more of your deductions?

For me the answer is no. Everyone should be as reluctant or as aggressive as they feel comfortable with.
posted by phearlez at 12:16 PM on April 11, 2006

Working for a company has the following benefits as I see them:

Two weeks vacation: $1500 ($40k/26);
50% 401k match assuming 10% cap: $2000 ($40k * 10% / 2);
Employer now covers employee tax: $4125 ($55k * 7.5%);
Health insurance, one person: $3700
Unemployement insurance: $1400

Unless there are others, I think you should either bargain for a higher salary or stay freelance.
posted by justkevin at 12:25 PM on April 11, 2006

One half of your SE tax is deductible so the 7.5%, which is the half your employer would pay, really only costs you about 5.6%, assuming you are in the 25% marginal bracket.

Also self-employment health insurance is 100% deductible, so reduce that cost by 25%.

If you take a lot of office deductions, like computers, software, etc, you will lose that as an employee.

In terms of cost, you may find that it is about a wash. In terms of security, you might, but not necessarily be better off as an employee. This includes unemployment insurance.

But perhaps the biggest factor is your freedom. As an employee will you be able to blow off Friday if it is a really nice spring day? Could you take off four weeks to go to Nepal? Can you go snowboarding in the morning after a fresh dump and then work from 2 PM to 10 PM at home? If you are already an on-site worker with all the restrictions of a direct employee, then none of these things will change, but for many off-site freelancers these are big factors.
posted by JackFlash at 12:49 PM on April 11, 2006

My friend went from freelancing to staff, but he didn't have any choice. His salary went from about 80k per year all told, to somewhere in the 40k range. So your 55k to 40k drop isn't very much at all.
posted by antifuse at 1:03 PM on April 11, 2006

phearlez, I don't want to be offensive but I know you're not an accountant, and you are completely misreading the entertainment section, which simply does not apply to catesbie's situation. just because the home office exemption is very limited does not mean that any theory you come up with for how "strict" the IRS is means anything at all. All of the deductions are governed by a written statute, which are described in publications similar to the one you (mis)quoted.

I am not an accountant either so I am going to bow out of this specific point, but just wanted to point out to catesbie that you're wrong. and she should consult a tax preparer.
posted by miss tea at 1:15 PM on April 11, 2006

I don't claim to be an accountant, however the term 'wrong' and the statement that all deductions are governed by written statute are both over-simplified. There flat-out is not a perfect 1,2,3 kind of enumeration of 'right' and 'wrong' deductions. There is a lot of discretion on the part of examiners and there are many tax professionals who contend that they tend to be inadequately educated and exhibit general biases.

"1.410 Educational expenses are an area of great scrutiny by the IRS. The Service will seek to determine if expenses were primarily incurred for the purposes of maintaining or improving skills or meeting express requirements or retention of status." Note the 'primary' which is also littered around IRS documents. I keep quoting the entertainment section because I am certain you will never get an auditor to view Hollywood movies in the education category.

Also from the above document: "You should maintain a professional demeanor during the discussions with Revenue Agents. Personalities play an important role during an audit. If the Agent doesn’t like you, you can bet your client will receive harsh treatment. Given the power that Agents have, you must approach them in a polite manner." If the tax lawyers are saying that auditors should be handled with kids gloves what do you think that means for the rest of us?

Yes, you have appeals after that point but as I have made repeatedly clear, my opinion and personal philosophy on the matter is that the payoff of deductions that are open to interpretation are not worth it. Do as you feel comfortable and indeed, consult a tax preparer BUT you can spend 3 seconds googling and find a multitude of articles about overly aggressive tax preparers with regard to deductions. There's a special IRS tax force on the issue.

All the publications you speak of are online. Catesbie should examine #535 and the education section herself. I'll note that the document is -very- clear that maintenance of minimum industry standards (ie, being aware of the state of the field) is explicitly excluded.
posted by phearlez at 3:56 PM on April 11, 2006

As mkultra has said, job security is a key issue. Are you concerned that the company are about to let people go? If they did would it be hard to find similar work elsewhere? If the answer to these questions is yes then perhaps you'd look at a little more than just the money when it comes to becoming staff. Also, if you're looking for a period of career development, the title and responsibilites that come with a permanent position can be crucial, though in the right place you can achieve these things as a contractor.

If none of these are an issue I'd remain contract. The money is better.
posted by nthdegx at 9:01 AM on April 12, 2006

« Older Um, how do I make the text baselines even in our...   |   Fix it or junk it? Newer »
This thread is closed to new comments.