Pros and cons of contracting

“Do you walk on water?” the young lady asked me as we were introduced. It was my first day as a contractor and I was meeting the quality assurance team who would test my code. “Excuse me?” I replied, taken aback by her non sequitur. “You’re a contractor in software development, so I asked if you can also walk on water.” she explained. I had just turned 25 years old and was starting my first gig as a contractor at one of the largest companies in Silicon Valley. Only later would I realize that this company had about five support engineers for every developer. They had three different test departments: Quality Assurance, Certification, and another one that I could never figure out what they did. In addition they had both Customer Support and Product Support departments. Being a software developer here was rare indeed. Being a contractor, a hired gun to write code, well that was an accomplishment of biblical proportion.

In terms of sheer dollars per hour, computer science contractors enjoy a higher salary than their peers who are full-time employees. If you’re looking to turn a quick buck, you should accept any contracting opportunities that come your way. Not only will you get paid more dollars per hour but you can get paid for more hours! You see, contractors get paid straight time for overtime and weekend work. Full-time employees are often told “We’re professionals here and professionals are expected to work more than 40 hours per week.” It’s ironic that the word professional only comes up when someone wants you to work for free – the very definition of amateur.

The most common argument against contracting is that the employee benefits, such as vacation and health insurance, are so valuable that it more than makes up for the difference in pay. Nonsense. Paid time off (holidays, vacation and sick leave) amount to about 12% of the work year. Insurance and the employer half of FICA account for another 11% or so. Let’s add those together and round it up to an even 25%. Note that this isn’t an extra 25% pay like a bonus. These are things that you don’t have to pay for, or days you don’t have to work in order to collect your base salary. As a contractor, you’ll make approximately twice as much per hour. That’s 100% more, cash in hand. You can buy plenty of insurance with dough like that. Remember the overtime pay as well. That will more than likely offset any time off you need to take.

One more word about health insurance. Contractors often fall into the “young invincibles” mindset and choose to go without any medical coverage. That’s exactly what I did for one year and was lucky to have only small medical bills that I could afford to pay out of pocket. If I had been diagnosed with a major disease that year I would have been screwed. Even if you’re in good health be sure to carry at least catastrophic health insurance. This is a low cost, high-deductible option that acts as a safety net for major health problems. With the Affordable Care Act (ObamaCare) taking effect, this should become a non-issue as contractors will have access to reasonably priced insurance plans and coverage will be mandatory.

Back to the pros and cons of contracting… If it pays so well, what are the downsides of contracting? In my opinion, the worst thing about contracting is the down time. You know how stressful it is to start a new job or get laid off. Imagine going through that several times a year. Companies hire contractors to cover short term increases in work load. A typical contract lasts 3 or 6 months and can be renewed. If you’re still sitting there 12 months later, chances are they’ll let you go or offer you a full-time position. When you’re between contracts it’s just like being unemployed. You’re out there selling yourself, trying to hustle another gig.

Be sure to build down time into your rate. The formula I’ve always used is to divide my full-time salary by 1,000 to arrive at an hourly contracting rate. So if you’re making $85,000 as an employee, ask for $85/hour as a contractor. This works out to be about twice as much per hour. Another way of looking at it is you can be down half of the time and still break even.

One way to find contract jobs is to register with an agency (or job broker). I try to avoid them if possible because they take a big cut of your hourly rate (like $20/hour) for the whole time you’re on the job, even though their work is done once you sign the contract. A colleague of mine took it to the extreme. He bought an RV (recreational vehicle) and registered with three different nationwide job brokers. When one contract would end he’d ask all of them to look for another job anywhere in the country. Then he’d drive to the job site and live in his camper. That’s not my idea of a good lifestyle but I guess he got to see the country.

If you’re going to contract then the first thing you should do is set up a corporation (an S corp is fine). A doing-business-as (DBA) company is not going to cut it and here’s why: The IRS considers a DBA company an individual. An individual who works on site at a company full-time under the company’s direction is considered an employee. A client who pays such an individual as a contractor (i.e. without withholding payroll taxes) could be charged with tax evasion. Companies are wary of this and will try to put you on a W-2 unless you have a corporation. Then it’s a contract between two companies with form 1099 and the IRS will leave you alone.

Contracting isn’t for everyone. You’re expected to hit the ground running with very little training. Even if you can find a steady stream of jobs, you’re constantly under stress to learn the ropes at new positions. The full-timers won’t want to build close friendships with you because you’ll be leaving soon. When you do leave, don’t expect a going away lunch (that way you’ll be delighted when you do get one). Still, it’s a good learning experience and you can’t beat the pay.

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