Want to become a contract consultant? Things you should know
Looking back over the last decade we all recognize the difference in employer / employee status changing around us. More companies are looking to hire contract workers based on project work, instead of full time employees. If this is a good or bad strategy for companies is entirely another topic that would be good to address later. But for those interested in the benefits and detriments of contract consulting work, please continue on. My goal is to provide the background information as well as the associated costs. Also note that this discussion is somewhat biased towards contract consulting in the United States, but many of these same issues may pertain to our EU/ME/Asia colleagues as well.
• One of the primary benefits of contract work is that you are now your own boss and can somewhat choose what projects you want to work on and when. This can be a nice benefit if it aligns with the employer’s schedule as well.
• The pay can be very lucrative for the right position. There are still employers in the market that understand they get what they pay for. If the right person comes along for the right project, then they are willing to pay fair rates.
• Crazy as this sounds, the US IRS tax codes are very favorable towards small businesses. In many instances, computer equipment, insurance, professional conferences, training and work expenses can all be deducted from your total income. This can be substantial. None of these tax benefits are available to W-2 employees.
• The biggest downside to contract work is that it can be very sporadic. Like the old saying goes, ‘When you’re hot, you’re hot. When you’re not, you’re not.’ Rough estimates have shown that a contract person may only be working 50% to 75% of the time. The rest of the time is spent searching for the next contract. To offset the downtime, I highly recommend that any contractor set aside the equivalent of one year’s home expenses in the bank or elsewhere to cover the inconsistencies in contract employment. Another option that can help buffer the income inconsistences is to have secondary income, such as rental property. Bottom line is that if you are in a financial position where you need a steady paycheck, then contract work is most likely not for you.
• The next big problem is medical insurance coverage. To put it mildly, independent insurance plans in the US are a nightmare and vary considerably in price. You can expect to pay at least $1,000/month, and more likely approaching $2,000/month for a family plan. Yes, the medical insurance program here in the US is a virtual train wreck, and getting worse with each iteration. Hopefully your spouse is working for a company that provides a real medical insurance plan so you do not have to purchase independent coverage.
• I listed US taxes as one of the benefits above, but it is also a detriment as well. Now that a person has the ability to take all the newfound business deductions, these same deductions must be entered into your IRS tax return. This can be an intimidating process when starting out, but once you understand the process and if you use TurboTax or another tax package, you can start to build a template for your taxes. This makes it much easier going forward.
Setting up your company
Limited Liability Company (LLC) or Subchapter S Corporation (S-Corp)
Employers want to make sure that they are getting the right person for the right job. In most cases, that means they are not looking for someone that does contract work as a hobby. The LLC or S-Corp shows that you are registered as a professional business. This is done at the state level, but is legally valid in all other states. Specifically to LLC’s, they are administered at the state level and you can expect to see different initial costs as well as annual costs afterwards. Prices vary from $50 to $500 for the initial filing, depending on which state you live in. But the average filing prices seem to be around $125. The annual fees run anywhere between $0 and $800, with California being the most expensive.
You most likely do not need to hire one of the online services to register the LLC for you. The LLC filing is usually an easy process with only a few pages to fill out. (Name, address, phone number, company name and so on). The difficult part is to find a unique company name for your new business.
Another reason why a LLC or S-Corp is so important is that it gives the employing company legal separation from the person preforming the work. Unfortunately, there have been multiple cases in the past where companies have hired the contractor directly, paid the contractor directly by name and then ended up in court with the contractor stating he/she was an employee, but not receiving full benefits. The hiring companies have consistently lost these court battles and have had to pay out large settlements in these employee/contractor disputes. The LLC or S-Corp provides a safe legal separation for the employer when dealing with a contractor. The employer pays the LLC or S-Corp, who in turn pays the person.
Federal Employer Identification Number (EIN)
This is part of the registration process that links your new company to the Federal system. The easiest way to think of the EIN is a company Social Security Number. This is a one or two page online process takes only a few minutes to complete.
Business insurance is a must for being an independent contractor. Almost all companies require the contractor to have insurance. There are multiple agencies that provide basic business insurance for a start-up company. Rough costs seem to be approximately $500 for an annual policy.
Business bank account
Now that you have an LLC or S-Corp and want your new client to be paying your company, you will need a business account. This is another one of these easy processes with your local credit union or bank. They will most likely want to see some type of ID, your LLC or S-Corp paperwork and the EIN.
All professional companies need a web site. When planning your site, you should be focused on quality versus quantity (number of pages). Since most internet access is by iOS or Android devices, you should have a responsive website which WordPress can provide. Be sure to get a certificate so the website displays with HTTPS:. Just as an FYI, within the next year, Google Chrome will be flagging the generic HTTP: sites as ‘Not Secure’. There are free certificates on the market and many website hosts also provide certificates free of charge. Use them.
There are a multitude of contractors in the market today. Therefore, how does a prospective employer get an understanding of someone’s basic qualifications? Probably experience and certifications. Your BCI certification demonstrates you have passed the requirements for the profession. Other certifications that are highly regarded are the CBCP by DRII, CISSP by (ISC)2 and the PMP by PMI.
Working with the Client
W-2 .vs. 1099 Corp to Corp. (C2C)
Now you have your own company set up and ready to go, we can look at how to set up the payments from the employer to your company. By far, it is best to have your new employer pay your company directly. The jargon is usually called C2C. Payment to your company not only provides the employer-contractor separation but allows all associated expenses to be deducted from your taxes. However there are occasions, usually with major corporations that will require a contractor to be hired through a recruiting agency and payment made under the W-2 system. This makes you legally an employee of the recruiting company, and not an independent contractor to the end client. Big difference. If you have other C2C jobs for that calendar year, then you can deduct the associated expenses on that portion of the income. If you are working for the entire year on a W-2 contract, then you are an employee, not a contractor.
That being said, I am not saying to dismiss W-2 offers. If the pay rates are good, then it definitely may be good to continue the conversations with the company or recruiter, especially if you are being offered a position that is work from home or in your local area where travel is minimal. I have been offered some so called exceptional opportunities, but were W-2 status and remote. This is where it is important to get your calculator out and verify the income will be sufficient to cover all expenses and still provide a reasonable profit. This process is an absolute necessity. As a general rule, expenses can eat up most if not all the profits of a W-2 remote project. In my seven years of contract consulting work, I have not been offered a W-2 salary that would cover expenses on travel. And I personally know people who have taken these types of engagements and lost money by working. Therefore, do the numbers on all offers to see if there is any profit to be made. I have told recruiters directly it is better and more profitable for me to get a job stocking shelves at Home Depot instead of taking their business continuity consulting contract.
What works best
First and foremost, any contract consultant must understand they are also responsible for keeping company expenses down. Always keep that in mind.
It is an absolute given that a contractor must be onsite for some of the project, such as collection of data, interviews and general getting to know your co-workers. Relationship building is critical for any project. Onsite time is for meeting with people and gathering information. A phone call is not going to cut it.
Then figure on three to six weeks at home working on documents and plans. This is the time for phone follow-up and working out all the details. Hopefully you have built excellent relationships early on and this will make the follow-up go much smoother. This balanced onsite/remote schedule worked very well for me on a major BC project for a large healthcare services organization. This topic of onsite requirements should be addressed with the company’s BC Director or whoever your supervisor is at the company. A balanced onsite/remote presence has proven to be very cost effective for the company and worthwhile for the individual contractor.
Also while on the topic of attending business meetings for collecting information, five to nine business meetings in a week can be brutal on the memory. Who said what again? I learned long ago recording all the meetings with my iPhone was critical in keeping information straight. So far, I have not had any objections from any of the attendees about recording the meeting. They understood it was all about accuracy for their plans.
This is where the audio recordings are worth their weight in gold to make sure the plans are accurate.
Billing rates and expenses
The question always comes up, ‘How much should I charge as a base rate?’ That is a difficult question and unfortunately, the real answer is, it depends. It depends on length of contract, a person’s experience, certifications, education, location (i.e. New York City compared to Omaha), and other variables. But one of the best ways is to review the info that is contained within BC Management’s Salary Survey. Hopefully you have been diligently filling out the salary surveys and receiving your copy. BCM’s salary survey is not a definitive answer, but it will give you an idea of where to start. As a general idea, I would suggest $80/hour for general consulting in the Midwest, with medium experience. Adjust from there based on your background and the task required.
Expenses are another topic that needs to be watched closely. If there is more than minimal travel involved, then who is going to pay for it? It can be included in the base rates mentioned above, but is usually not cost effective for the employer. What has worked well in the past is to set up an agreement to follow the employer company’s travel policies and then get reimbursed after submitting receipts for airfare, hotel and car rental. The companies most likely have arrangements with local hotels and preferred rental car agencies. The day-to-day expenses are paid by the employer according to GSA’s Per Diem rates.
This arrangement covers the basic contractor expenses while keeping the total costs down for the employer. That is the goal.
But be forewarned, many recruiting companies (maybe six out of ten) will try to avoid the expense discussion all together and fall back to calling it an all-inclusive rate. It is important to remember someone will be paying for these expenses when negotiating a contract. Will it be the employer or you? If it is the latter, make sure the base rate for the contract will be more than sufficient to cover expenses and still make a profit.
When to walk away
If you get into the contracting aspect of the BC profession, then it is safe to say you will run into a multitude of different prospective employers and recruiters. Some good, some not so good. Good employers/recruiters will have answers ready for any valid questions on the position. The not so good employers/recruiters are OK with the idea of asking you to commute 3 or 4 hours each day with no expenses, or no understanding of RM/BC/DR, or unrealistic pay rates, or many other TBD’s once you sign on. Just because an employer/recruiter tells you it is an exceptional opportunity, you need to determine that yourself. Get your calculator out and verify the numbers.
I would highly recommend you make contact with some of the ‘real’ professional recruiters in your area. Let them help with finding the right contract for you. For this author, I have business relationships with three major recruiting firms who know what we do professionally and look for the right matches. I will post a few of the professional recruiters I have worked with in the past and other recruiter related info on my blog site. This should help you get connected with a professional recruiting organization.
About the author
Business Recovery ConsultantOwner / operator of Strategic Continuity Solutions, LLC with over 25 years of experience provides consulting services in the areas of: * Risk Management * Business Continuity * Security Planning * GRC____ Professional certifications include:* (FBCI), * (CISSP), * (CBCP), * (ITIL)____ Accomplishments include: * One of the five finalists for BCI’s North American Award for Continuity and Resilience Consultant, 2015 * Masters of Information Management degree, emphasis in Security * Multiple articles published by Disaster Recovery Journal and featured guest speaker at multiple events.