* Your price sends a signal that attracts particular clients, and the ones you attract with lowball prices are the worst, most demanding kind.
* Your ordinary good clients aren't shopping on price, beyond a vague notion of what the normal range of prices for your field is. Remember: they're generally not spending their own money.
* Any client big enough to have a purchasing department is never going to let you get your rate back; their whole job is to prevent vendors from ever raising rates.
* There are a zillion things you're selling as a consultant that you don't realize you're selling, from schedule flexibility and freedom to fire at will to answering phone calls about the project deliverable 3 weeks after the project is done to not having to pay benefits and payroll taxes to documentation, and you're much more likely to forget to capture this stuff in your prices than you are to overcapture it.
I'm not sure I've ever met a new consultant that had unrealistically high rates. But most new consultants I've met have had unrealistically low rates.
If a client balks at your rate, you can still get the project cost where they need it to be: negotiate on scope instead of rate.
I‘ve been billing hourly for over ten years now, and I agree that it is cursed.
But as much as I’d like to switch to daily/weekly billing, it feels like I would never allow myself to leave the desk to run errands, play with the kids etc - because I promised to work the (whole?) day/week.
Even if you don’t actively tell clients when exactly you do work, clients can see your away/offline status in Slack/Teams, or they might call you out of the blue, which would feel to me like being caught with pants down - talking about a failed deployment on the phone in the supermarket?
And I’d be worried then that the client comes to the conclusion “Oh that guy, bills the whole week but doesn’t even work in the afternoon. What a slacker!”.
There is no relationship between your billing increment and the specific times you're at your desk. You bill a day for any day that you do significant work for the client; that's it. The notion that billing a day means you've booked 8 contiguous desk hours for your client is just hourly billing thinking; that's part of the reason you want to stop billing hourly in the first place.
This and your other comments really helped getting an intuition for why daily/weekly billing is preferable over hourly - thanks for patiently reiterating this.
Especially your point „daily billing means I don’t work on other projects that day“ seems like a framing that could work well for me.
I think "don't double book yourself" is a good rule of thumb, especially when you're getting your sea legs, but there are ways to do that, with daily (or weekly, or monthly) billing, once you know what you're doing and you're confident about your scheduling and your business relationships and the way you set expectations.
The one expectation you should never set with your clients is hour-by-hour accountability. It's not even a win for the client: it just creates anxiety.
Reasonable clients who hire you to deliver a project three months from now don't expect you to work 24/7 for 90 days non-stop. They expect you to deliver what was agreed in three months. They happily pay for those three months because someone calculated it will save/make them more money. They don't care what happens in between as long as you keep them regularly updated, don't disappear on them, and respond to emails and calls in a timely fashion.
Ask yourself if you want the type of clients that obsessively check your online status on Slack. Most clients don't have time for that because they have other things to worry about.
If you're deploying something, it's prudent to sit tight for a while and monitor things. You can shop for celebratory champagne later.
If they absolutely expect you to pick up the phone the minute they call, hire someone to answer the calls for you. Now they have a dedicated account manager. Charge them appropriately.
If you want to read more, the OP of this comment chain, tptacek, wrote here a lot about charging daily/weekly vs hourly (and other nuggets of wisdom about consulting). Query `site:ycombinator.com tptacek hourly` in your favorite search engine. Here's an example: https://news.ycombinator.com/item?id=4103417
But tbh, customers aggrieved at your working practices are simply not worth having. If they don't trust you enough to do the work, they probably won't trust the output of it either, which all that it entails (not paying etc).
I've been a consultant in a previous life, and the best customers were invariably the ones who just let you get on with the job.
Depends on what a "call" represents. A 15 minute chat, happens once every other week or so? Just do it, don't count them. A 2-hour meeting? If it's part of prospecting for new business, you do it and eat the cost; if it's the readout for a project you've delivered, then you accounted for that cost in your SOW. If it's ongoing support, and they're not a house account you bend over backwards to keep happy, book a billable day or set them up on some kind of use-it-or-lose-it bucket of retainer hours.
1. Sane customers value determinism more than they value maximizing the productivity of a single hour. They're engaging you because they want a thing done, and the order of their concerns is: (i) assurance that the thing gets done, (ii) getting the thing on a predictable schedule, (iii) getting the thing done sooner, (iv) that they're not making a fool out of themselves by paying way over the market for the thing and (v) how much they pay. Note how far down the list the actual absolute billing number is.
2. Conduct a thought experiment: imagine you have a project that is going to take you a week to finish. Now imagine you take 100 Provigils (don't do this) and get the project done in 3 days instead. Who should get the economic benefit of that efficiency, you or your client?
You're metering, but at a lower level of granularity. You don't care about squeezing the maximum customer value out of ever hour, or maximizing hours you bill but don't do work in, because you're just not tracking hours. You work at an ordinary pace. Some days you're going to give your client 9 hours worth of productivity because you're in flow; sometimes they're going to get 7. It doesn't matter.
The only really important thing about your interval is that you can't book two clients on the same staffing in the same interval. If you bill daily, you as a general rule don't book two customers on the same day (really, I wouldn't do it in the same week).
> But as much as I’d like to switch to daily/weekly billing, it feels like I would never allow myself to leave the desk to run errands, play with the kids etc - because I promised to work the (whole?) day/week.
Bill by the project and this problem is solved.
That said, I'm one of the weird ones who prefers to bill hourly whenever possible.
So I keep hearing this, but I haven't seen it actually working in practice.
My wife has been (trying to) freelance since we moved to the US. She applied the playbook, rejected lowball offers, and negotiated higher rates.
The result? She has worked about a total of 2 months out of 1.5 years. The pipeline is dry and nothing is coming her way. In retrospect we regret not accepting some of those lowball offers. Sure, the rates suck, but not having a job sucks more.
My cynical take is that blanket statements like that are unrealistic and even harmful for some.
I agree. The original advice is very solid, but it applies after you're established yourself. Freelancers live and die on reputation, and when you're new, you have no reputation one way or another.
So the first thing a new freelancer has to do is to establish a good reputation. This means having a client history. Never forget that the world is smaller than you think, and people talk to each other about these things -- even if they're competitors.
This means that it can be a good idea to accept jobs that don't pay what they should. But the new freelancer still needs to get value that offsets the lower financial return, and that value is, basically, word-of-mouth and references.
That said, new freelancers (of any sort) have a very strong tendency to think that the "going rate" is much lower than it actually is. Talk to other freelancers in your area to learn what clients are used to paying before even thinking about setting a price.
One thing I had success with, and I've seen others have success with, is to make a proposal at the going rate, but add in an offer to take a substantial discount in exchange for permission to use the client's name as a reference, in marketing materials, etc. Especially if the client is well-known and respected.
The hardest part of being a freelancer is starting out, when nobody knows who you are. Once you have a couple of good clients under your belt, it gets much easier to find new ones.
The basic idea is that you don't want the client to think that you're a discount freelancer, but that you're offering to get some of your compensation in a different form than cash.
Because all of this has to balance out with another fundamental truth: people will tend to judge the worth or quality of a thing by its price tag. If it just looks like you're cheap, you will be perceived as being lower quality. And what most clients want is quality work, delivered as promised. Your compensation should encourage them to expect that, or at least not actively signal the opposite.
Do whatever you need to do to get on your feet. But you're probably not going to win much business by outcompeting incumbent vendors on price. There's a going rate for things; it's a band of rates. Price somewhere in that band, until you're on your feet, at which point you should start a process of raising your rates that ends when you retire.
I agree entirely. The problem for newcomers is getting the first couple of clients. Discount pricing can help with that. But it needs to be clear to even those clients what your real rate is and that they're getting a discount.
Just so we're clear: I'm saying discount pricing isn't likely to help you get your first clients, because most serious buyers of consulting services aren't making their selection primarily based on price, but rather on how certain they are that the project will complete successfully. Cut-rate pricing is a good way to lock in subcontracting arrangements, though.
I'm lucky enough to have a 9 to 4, but I do freelancing on the side as well. I've gotten lowball offers after sending contracts over, one in the past week that was 35% below my rate, which I already thought was low to begin with. If nothing can be worked out I'm able to politely refuse, but I'd be pretty sad if I wasn't financially secure to begin with and had to barter with these types.
I'm not sure if it's been mentioned yet, but one other idea is equity, whether it's with the company or ownership of IP/software. At the moment I have a client who has offered that I have all rights to the software I'm creating for them, in exchange for a rate of about 50% less. Of course this may or may not make sense depending on the company/project, but just thought I would mention it. Good luck to you and your wife.
Personally, I turn those down. When I'm freelancing, I'm doing it specifically to maintain a high degree of flexibility. Non-scoped jobs take flexibility away.
But I think this is a personal call sort of thing, and may be right for you, depending.
Huh? Staff augmentation contracts are super common. They're definitely not illegal. And the risk in employment classification mistakes is to the employer, not the contractor.
> Hourly rates Your price should be a reflectance of your skills level and your reputation. In the beginning of your consultancy career I would suggest to lowball the price, but not too much.
I've found that in my case it was beneficial for both parties if I asked a rate that made it worth it for me.
Worst case scenario they said no.
Every time I lowballed, I regretted it and didn't do my best and couldn't help it.
I lowballed in the beginning just to get a foot in the door and get some experience. But once you've had a few jobs that way, it's time to stop lowballing and get a bit more selective.
And then there was this one project that I really liked, and I ended up taking an enormous cut to continue on that project. That was a bad idea. It was a cool project, but being underpaid so dramatically did hurt my enjoyment quite a bit. (And it wasn't a charity or anything; it was a bank.)
I feel like banks are one of the last places you should try to peddle B2B/SAAS/consulting packages unless you already have a gigantic reputation to work with and/or deep domain expertise + a professional network.
Many bank execs want to sign contracts with a minimum of 5 year duration. No one wants to spend all that due diligence time & energy on a 12 month contract. So, the stakes are really high. They're going to want you to prove you will be around in a decade.
If their executive team is worried about your business continuity, but still really like the technology idea, that is where you run into the undercutting angle. They'll move it under a different cost center like "tech research and transformation initiatives" as opposed to "principal, line of business systems". They'll still talk to you, but it will be on entirely different terms than you would desire.
If you’re ok with the pace and general culture, “boring” places like banks and insurance companies can be fantastic for contractors. Especially if you know some of the niche products it’s pretty easy to command very respectable rates without the stress or grind of sexier companies. Oh, they _always_ pay on time and unless you’re terrible you can usually stay as long as you want.
Disclaimer: the above is my experience in Sweden, but I imagine the same applies elsewhere
The push for employees to become a "Consultant, freelancer or independent contractor" was the hope from companies that they could unload many costs of business to their ex-employees. Things like phone rental, insurance, car running costs, tools, etc.
However, people quickly learnt that unless the remuneration was increased in proportion, then the ex-employee was much worse of.
Plus the Tax Man quickly got involved and ruled that many Contracting arrangements were actually a sham.
There are now a list of standard tests to determine if a supposed contractor is actually an employee.
> There are now a list of standard tests to determine if a supposed contractor is actually an employee.
Not in the UK there's not.
HMRC refuse to provide a definitive list or say how they determine if a contractor is "acting as a disguised employee" (BTW you're still not an "employee" even if you're working Inside the IR35 regulations).
Instead they provide a vague tool that gives you some suggestions but reserve the right to arbitrarily decided later who is and isn't an independent contractor. They can, and have, retrospectively change the rules even for accepted tax returns.
That puts a lot of risk on anyone doing contract work. When the government changed the rules to shift some of that risk the customer, many customers just decided to drop small external contractors all together rather than work to a vague set of suggestions that they can't definitively say if they're complying with.
For small contractors it's difficult to get insurance for IR35 risks because of this. You can get it but it's not cheap or easy compared to other liabilities.
The contract market in the UK has been slowly dying since the tabloids first decided that contractors where another group they could demonise and the Tories gleefully went along with it.
IR35 is an absolute clusterfuck and I'm glad I left the UK and contract in Australia now.
It's a huge financial risk being held over your head at every turn. If HMRC decide to investigate that can cost you and you're likely to be on the hook for all sorts of legal fees to fight them.
If the courts side with them and decide that you are, in fact, caught by the legislation, they don't seem to work out liabilities based on what you paid in corporation tax, dividend tax etc, and what would have been owed under PAYE and NI, no, you get sicced with the whole lot again AFAICT. Neither does your determination as an employee entitle you to the employment benefits you would have had - pension contributions, paid time off etc - under that status. The whole thing is a big "fuck you" to the contractor.
IMHO it only exists because of the imbalance in taxes in the UK between earned and invested income. The system is broken and in response, instead of fixing it, they decided to fuck over small players by putting them in jeopardy.
IR35 was full of good intentions. Businesses were abusing the system by forcing low paid workers into self employment and contracting. This allowed them avoid paying national insurance or any normal employment benefits.
Unfortunately highly paid consultants have been swept up into very badly implemented legislation.
You are assuming there were good intentions. The real reason for this legislation was the fact that big consultancies were losing talent. Why should someone work through a big consultancy if they could work with the client directly.
Like, why earn £50k at consultancy if you can make £500 a day without them. It's a no brainer.
So these big firms lobbied Treasury and government and they used tax avoidance as a vehicle for the "reform". It's funny though how the fact that big consultancies are actually avoiding paying tax is never brought in.
Like tax yield from a big consultancy employee on £50k is substantially lower than from a contractor on £500 a day, even if they pay themselves the mythical low salary + dividend (which is a result of PAYE being not fit for purpose, but I digress).
Currently IR35 actually _enables_ abuse of low paid workers, because they can get hired on inside IR35 and can't get any employment protections.
Yeah I don't disagree entirely with the intent - stop tax dodging by dodgy companies and by dodgy contractors.
But the implementation, my god, it's a mess, and it seems to put the liability all in the wrong place, on the weakest party in the relationship.
And as I said elsewhere, the root cause of the difference in taxation for the contractor is that investment income is taxed less than earned income, something I find pretty hard to accept in principle.
The intention was to sweep up the consultants. They even bragged about getting an extra £1 billion out of these people.
It was mostly about enforcing a clearer class distinction between dirty workers and good clean capitalists (who are handed a lower tax bill).
The list of rules actually has an interesting historical parallel - the Soviet Union would deport peasants ruled "outside ir35" to siberia and confiscate their assets in a process known as dekulakization.
It really is a disaster for innovation. If a startup wants to launch or a company want to start a new product then they need a flexible workforce. They are going to end up with system integrators or nothing.
forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
personally I find that reasonable. the government should subsidize contractors.
so if a contractor just sets aside the same amount as they would have had to pay in a salaried job (including employers contribution) then all should be good?
obviously this should be factored into the cost of doing business, but if a person deems themselves fit for contracting, then they are also fit for this administrative overhead.
> forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
It's not that you're wrong, it's that what you're suggesting is naive.
There is no "equivalent" tax rate when working through a limited company and when IR35 applies per contract and not per worker.
That's just not how tax works here. Instead you pay an accountant to estimate your accounts, hand them to HMRC and they either accept them as correct or hold a tax investigation.
HMRC can't and won't tell you what you should pay, they just say yes or no to the estimate you provide them.
There is no way to know what a potential future fine might be because they could reopen all previous year's tax returns.
If they can't tell you then how can anyone else know what they should set aside?
I have also worked as a contractor (In Denmark, though). Working as a contractor in software development is rather forgiving, as there are only insignificant expenses. Therefore I can report most / all of my revenue as profits and pay full income tax. Knowing the basics of the Danish tax code, I can estimate my contribution and just pay it on a monthly basis to SKATs (Danish IRS) bank account. EOY I will report all my deductions, banks report all my capital gains, etc. and SKAT calculates the tax true rate and automatically pays me back within a week. If I forgot something, I can change merely change my reporting and everything is recalculated instantly.
However, hearing about the systems in other countries makes me appreciate the Danish system.
> forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
Yes, it is meant to, and that's perfectly reasonable as a starting point. That's how things are here in Australia AFAICT, without the need for this sort of legislation. If you are found to be inside the equivalent legislation in Aus, it mostly just affects what sort of expenses you can claim.
In the UK though, there is a legitimate question about why tax should be different if (for example) I go into business selling my skills and sell them to a client company vs IBM selling my skills to a client company. Why should the big firm get to pay its people a salary with a part of their fees, then give profits to its shareholders as dividends, if a one-person operation cannot do the same?
Also, as a contractor I am not an employee. I do not get employment benefits. I do not get pension contributions. I do not get paid leave or cover for illness. Does this mean I should pay less tax? Perhaps not, but it does mean that the concerns are different.
That all said, in general, I agree with you, the same rough tax rate should apply. I didn't do contracting/consultancy as a tax dodge.
The root cause of the issue that the government is addressing here, very badly, is that the tax rates are badly coded and favour investment income over earned income, something which I think is deeply wrong in UK society anyway. Normalise these and the whole issue goes away.
> so if a contractor just sets aside the same amount as they would have had to pay in a salaried job (including employers contribution) then all should be good?
No, as I called out in my comment above, the outcomes of status investigations are not "make up the difference", it's "pay all the tax without taking into account anything that's already been paid". And that's before we get into legal and accountancy fees, the fact that expenses incurred in doing business will be re-evaluated and likely denied as ineligible, and you won't get any of the benefits you would have been owed by the business or by the government as an employee. You'd have to put a lot more aside than the difference, it ruins people. And it costs a lot more people money - there are a variety of forms of insurance people take out to cover the costs of investigations, court proceedings and even the eventual liabilities.
As written elsewhere, I can appreciate the differencen between the tax codes in different countries.
When I contribute to my tax-exempt pension in Denmark, I can deduct that in whatever income I have, whether that is from an employment or profits of my own company.
> forgive me if I am wrong.
I think I need to defer to this one. I am completely ignorant on these things.
> what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
Yes, this is used as a vehicle to make this legislation palatable to the voter. The truth is, big consultancies who operate the same business model as a contractor are exempt from the legislation. So if big consultancy charges £500 a day for a worker, they don't have to pay PAYE on that £500, even though their worker work as de facto employees at the client's, but contractor would have to.
Being able to substitute staff. If you can accept a contract and then send your next door neighbour to do the work then that is a strong signal that you are outside IR35.
This is entirely irrelevant unfortunately. You could be able to send substitute and still be in-scope of IR35. It's ultimately down to the client's risk appetite.
They can't provide a definitive list because case law can always overturn it.
I guess the best they can offer is "if you do this, we will choose not to go after you". But even that can change, as you point out. They don't have the resouces to chase even close to everyone, so they have to rely on media messaging to do a lot of the policing for them (hence going after high-profile targets like TV presenters).
Scam Contacting is just another way of extending the Gig Economy.
Some professional people may be better off as contractors, but huge numbers of young people are being ripped off by being forced into irregular hours and trying to juggle multiple jobs.
It's not the left wing or the Unions who are behind the recent explosion of insecure work.
A good accountant will make suggestions about things like control over work and deliverables but they can't tell you for sure if a contract is Inside or Outside.
They don't know that because HMRC don't publish that information and their online tool only makes suggestions that you maybe inside or you maybe outside.
You might think "just operate like a business not an individual" but that's not as easy as you might think.
IR35 applies per contract not per worker. So having multiple concurrent customers doesn't protect you.
If, say, you set up deliverables for a piece of software, deliver it to schedule and provide support during a testing period.
Is that Inside or Outside IR35?
The work has deliverables so that sounds like you're operating Outside. Hang on though, it also has a time-base component where you're providing support. I'm afraid time-base is probably Inside.
Your accountant does not know for sure and they won't provide you with any real form of indemnity for their advice because of that.
Netherland also still doesn't have clear rules about that. A couple of years ago they tried several things, and people and companies rebelled against some of those, and now they're mostly ignoring the whole issue again, I think.
At least in my field, where contractors are paid far better than employees. There are also obvious, blatant cases where companies do use this as a loophole to reduce costs. And sometimes they do that with permission from the tax service, even! PostNL, the Dutch postal service fired all their mail deliverers and hired them back as contractors, but they still had to follow the schedules set by PostNL, wear their uniform, etc. Yet the tax service approved that.
I don't get it. I think that's a blatant case of the abuse they're supposed to fight. But at least they're leaving me alone for now. I think the unspoken rule is that if you're paid well, it's probably fine, and they're focusing on cases where people are underpaid and unable to save up for retirement. Because those are the cases where this is going to cause problems.
In Netherland, being a consultant, freelancer or independent contractor is the only way to get paid your worth. Salaries for programmers are often terrible. Well, maybe not terrible, but lower than they should be.
I had a project at a bank, where I created the initial prototype for a new, vague idea and guided the project (through constantly changing product owners and other team changes) to become very successful. Because the tax service was being difficult about the difference between a self-employed contractor and an employee, the bank had a rule that self-employed contractors couldn't stay for more than two years, but after two years, I wasn't done with that project yet. So I became an employee.
The bank has pay scales for employees, and I had to fit in there. Software engineers could have a pay scale from 8-12, product owners, scrum masters, business architects and other people I worked with had pay scales from 10-13. One freelancer-turned-employee that I spoke to came from a very similar hourly rate to scale 12 (as product owner). I figured I was worth scale 12 too, but it turned out they had no programmers in scale 11 or 12 at all, and 10 was the maximum that was used, despite the fact that 10 was the minimum for pretty much every other job at that department.
Later at a department-wide meeting, the manager had the gall to complain that all their senior engineers would leave.
Many other companies pay similar rates for programmers as employees, but have no problem paying much more for you when you're a contractor or freelancer of some sort.
It is not that simple and varies country to country. Here Finland best software developers usually go consulting/freelancing in their later career because that is where big money is in our software ecosystem and it has some rather big tax benefits.
Here in the Netherlands I've seen this too. It's somewhat confusing to speak about freelancers as a single group because they stretch all the way from doordash drivers making minimum wage (and sometimes less) to well-paid someware developers making about twice what a employed senior dev would. One of those is economically precarious and needs (government) assistance, the other is doing just fine.
also I should note for being a consultant to make any sense you should really make twice as much as a permanent employee since you have to take care of your own pension, vacation, often have to pay for meals where employees get them paid for, and have the chance of going some months without work when a contract gets over.
Also sick days, public holidays etc. Yeah, twice the rate is just about right to compensate all the added stress and potential to have 0 income for months, without much of a social safety net. Good year and you will come on top easily, a bad one can literally wipe you off the face of Earth. Also depending on given system pension savings can be minimal.
Once you have kids and whole family to feed and pay various expenses for, the pressure to keep earning is non-trivial. There is some envy from perm employees towards better paid contractors, but I always tell them to try that. A lot of 'but but XYZ' reasoning for why it can't be done now happens afterwards.
> a bad one can literally wipe you off the face of Earth
This is where living in western Europe helps a lot. But yes, you have to take care of more things yourself. If you cannot maintain a financial buffer of at least a few months, I would not advise starting off on your own just yet.
I live in The Netherlands and work as a contractor. I would have to sell my house, my car and eat through all of my savings including most of my retirement fund before I am eligible for long-term unemployment (bijstand). And there isn't any other form of safety net for contractors. Not really an option for me.
We do have private insurance so that you don't bankrupt yourself in case you get cancer.
Because much of Western Europe has a better social safety net (especially healthcare) than many other places, a lot of people seem to think that being out of work for an extended period really isn't a big deal.
Even in western Europe, being self-employed means you're opting out of a lot of the things that are so well-arranged for employees. No paid sick leave, no paid vacation days, no unemployment benefits, you have to save up for your own retirement and get your own disability insurance.
And yet, for me it works. I'm much happier this way somehow.
I write this from Western Europe perspective, it goes all downhill on social help from there anywhere else you look :)
You don't have that much of social safety net when working on your own, thats mostly for perm employees. Financial buffer is obvious, but what if you end up with some horrible accident or illness that will drain it and need more. The amount of continuous stress is much higher compared to perm employees, additional bureaucracy, the need to chase next employment, overall insecurity etc.
Depends on the domain. IME there are niches outside of CRUD where you can be backlogged for years: you'll have to solve hard problems though which is not a good fit/WLB for everyone.
Same in Germany. You can get about twice the pay (if you manage to stay fully booked), though you don't save anything in taxes -- unless you count in VAT free equipment purchases and avoiding the public pension scheme.
Are you saying you can't get any of your business revenue classified as capital gains, or that capital gains are not taxed lighter than salaries in Germany?
In Finland, you actually have to participate in the public pension scheme even as an enterpreneur - this is part of the mandatory social security system.
In Finland, the first part of the dividend is taxed very lightly. That's not the case in Germany, where all dividends are taxed at the regular capital gains rate. Which yes is generally lower than your income tax rate.
But you're also paying corporation tax, which pushes the tax rate a bit above what you'd pay if you just paid the regular income tax. And then you're in another level of bureaucracy and accounting.
That was the rough situation when I was considering incorporation and abandoned the idea. Others have taken the company route and may have found ways to make it work for them.
Agree to an extent. Contractor relationships are abused at many companies, but this is usually the case with mid to low level positions. People who make it through senior ranks and go on to become consultants get treated very differently. The latter is also incredibly lucrative.
Can confirm. Senior consultants are also very valuable to companies because they can say and do things that are necessary but politically taboo within the organisation. - Like pointing out underperforming teams and managers to upper management.
> Plus the Tax Man quickly got involved and ruled that many Contracting arrangements were actually a sham.
That's not entirely true. The tax man was lobbied by big consultancies that were losing talent. Because quite often, an employee of consultancy would have found they could make more money by working with the consultancy client directly and cutting out the middleman.
If these arrangements were "a sham" then tax man would have included big consultancies in the scope of relevant legislation, like IR35 here in the UK.
> people quickly learnt that unless the remuneration was increased in proportion
I mean, not only is this my experience, but that's the trope, no? You get fired and then hired back as a consultant for twice the cost? Regardless, if that isn't happening, this doesn't seem like a problem we should be fixing using government. No matter how you are classified, you need to make sure the net compensation you are receiving for doing the job is worth all the costs (which includes not only any time and materials you are supposed to be bringing to the job yourself, but also indirect stuff like occupational risk exposure).
To put this story in reverse: somehow in the United States we've pawned off the problems we SHOULD be solving using government--stuff like health care, retirement planning, and disability leave--to private companies to each separately manage for their individual pool of employees, which has resulted in a system that privileges larger companies that can have larger and more amortized employee pools and has created this ridiculous idea that there is this concept of an "employee" that must be mandated and enforced. It is all a massive misdirection that helps lock in and prevent collective action.
That’s easily remedied. Many companies will not work with 1099 contractors and will only work with third party consulting companies.
When I was a dev lead, my manager wanted “another me”. I had a friend looking for work and he wanted $80/hour. My manager didn’t have a problem with the hourly rate. He was willing to pay $110 per hour to the consulting agency we were going through so they could hire him and we could work through them.
True. Germany has strict rules against scheinselbständigkeit (shadow employment) as well. However many intrepid consultants find ways to skirt around it.
> However, people quickly learnt that unless the remuneration was increased in proportion, then the ex-employee was much worse of.
People who have only ever been employees are often ignorant of how much money is spent on them that they never see. It can be quite a shock when they become self-employed and are required to pay these costs directly. Although that's nothing compared to the shock when they learn they now have to pay taxes quarterly, and in advance of each quarter.
My (very rough, US-based) rule of thumb is that I need to bring in revenues between 50 and 100% greater than what I want to "take home" in terms of personal income.
Which tax man in what countries? Based on your vague description I see a picture of labor protection asking employers to pay their fair share, not the tax man.
Yes that's the problem. People often work exclusively for a single employer but call this contracting because supposedly it's a deal between two companies (a real company, and a one-person shop). But no, that's still an employment contract, this is determined by the nature of the relationship, not by specific words written in the contract or rituals such as issuing an invoice.
The core difference is contract of service vs contract for service (in the UK anyway). How many employees you have, or how many clients you have, doesn't enter into it because the decision is made on a per-contract basis.
If you think the length of the contract should be the determinant of the relationship, I have to ask what you think the maximum should be? I assume you still want to be able to hire a builder for three weeks to build an extension without going to the trouble of paying his tax for him, but you think three months for an IT contract turns you into a disguised employee. So where's the line?
Probably around the 3 months, maybe 6 months. It's also not just about time. Smarter people than me would have to answer, but the general principle, following the spirit of employment law, seems rather obvious.
Imagine I started a warming-up business, where you could sign a short contract for warm french fries and warm cooked meat. But I'd insist it's not a restaurant, so that any hygene rules do not apply to me.
They have! Lawmakers and judges that are better at this than both of us put together have been wrangling over it for decades. The spirit (and letter) of the law is pretty clear that length of service is not a consideration here - in fact, HMRC don't include it in their CEST tool, which is very maximalist.
The actual tests, in law, are supervision direction or control, mutuality of obligation and right of substitution. IT contractors are generally weakest on substitution - it's written in to contracts as a fig leaf, but very seldom triggered. If a court finds that actual working practices differ from what's written in the contract they'll prioritise working practices in determining employment status. The clause I had to modify most often was one attempting to control working hours - because that would point to supervision direction or control. It's amazing how many agency contracts had that baked in.
Is this a problem though? I a lot of countries you can open a 1 shop company, and any two companies can sign whatever they agree on into the contract. Of course some higher level laws may void (parts of) the contract.
Do you think that “nature of the relationship” is more important than wording of contract? Why?
If countries hate the idea of 1 person shop contractors they can still ban the “shadow employment” via higher level laws. If they don’t I don’t understand how this is a problem.
> If countries hate the idea of 1 person shop contractors they can still ban the “shadow employment” via higher level laws. If they don’t I don’t understand how this is a problem.
They do. The problem is deciding whether you are a contractor or an employee under such laws, and the risk that the tax man (and employment insurance system including health care and pensions) will retroactively deem you a factual employee, thus creating a large set of potential liabilities for all involved.
Not currently in Poland. There were attempts to do so though. All in all certain presumptions can trigger red flags for the tax office, all and any of the following: 40h a week, paid days off (especially 20/26 days), work in the same place, at the same time, under supervision. With IT its safest to contract for a company without entity in Poland. Also you’ll find many people who still cover a lot of the above and never been bothered by the tax man. So I’d say its just being extra careful.
Not in all of EU: at least in Finland, the tax office clarified a long time ago that if the papers (business registration, contracts, insurances etc.) are done properly, the number of clients doesn't matter.
> This time should be removed from the log, it’s still there but it is your time, not your customers time.
Oof, lost me here. Guess what? It is the customer’s time.
Software is huge. Huge huge. Gargantuan. I don’t have an eidetic memory and if the customer wants a developer with eidetic memory they’re free to look for one.
I will always be learning and re-learning. It’s a big field with lots of long small pitfalls. If you have a non-standard system, it means I’m digging and re-learning some shit I thought I had the luxury to forget. That is _definitely_ on the customer.
Personally, I think "charge by hour" is not a good piece of advice. If you are a low-tier freelancer, there may be no other way to go, and you must accept that.
For most things, mid-tier to high-tier, from my experience, it works better by day or (even better) by project.
Suppose there are only a few billable hours. In that case, there are many times more non-billable, for anything, from negotiating, through communication in between, to finalizing and invoicing. Also, 8x1h is much more work than 1x8h. The latter is a typical workday; the former is exhausting with its context-switching.
You're going to find a lot of (completely valid) advice on both sides -- bill by hour and bill by project. Out in the wild, there are a ton of factors that are going to make that advice either good or bad.
For example, the book, Million Dollar Consulting, is pretty famous for advocating the "charge by value" approach. I think a lot of what's stated in that book can make sense when you're 1) highly specialized and 2) are in high-demand. You have a lot more leverage in those situations and both sides of the equation likely know what value you're creating. These are the types of situations where managers inside the company you're working for are motivated to get through any red-tape your "non-standard" pricing models create.
However, in a lot of cases, businesses have policies and controls around how they structure contractor pay. You should certainly be flexible to not limit yourself, especially if you don't have a whole host of companies knocking at your inbox.
I'd suggest really thinking through how much time it takes to acquire (pitching, negotiations, other pre-contract meetings) a client, how much admin time it takes, and just build that into your hourly rate. Setting up retainer agreements is also usually a good idea for you and something clients don't typically balk at -- e.g. you will be paid a minimum of 10 hours per week, even if you only worked 5 hours.
For anyone worried about limiting their income by charging hourly rates, I'd suggest looking around at what high-end law firms, creative agencies, management consultants, accounting firms, etc. charge. As a solo consultant, you're ALWAYS going to be constrained by hour many hours you're willing to work, regardless of how you bill.
Per project or per time is one question, and yes - it depends on many things.
My point is that, from my experience, "per day" is strictly better than "per hour". In principle, you can say "just build it into your hourly rate". In practice, it is only if it is agreed beforehand how many hours, how distributed, and what is the non-billable overhead. Plus, adding conditions like "I am being paid for at least X h a week, I work in blocks of at least Y h, etc" , in my experience, added needless friction. I have learned to avoid the friction by saying "I don't have an hourly rate; my daily rate is X" and, if needed, adding that I am open to splitting some days in half.
> You should certainly be flexible to not limit yourself, especially if you don't have a whole host of companies knocking at your inbox.
I hope "you should" is rhetorical - I know what I am doing. Sure, there is a balance between how many clients are interested and how well I set conditions of collaboration with them. Obviously, in terms of when you set the balance, YMMV.
> For anyone worried about limiting their income by charging hourly rates, I'd suggest looking around at what high-end law firms, creative agencies, management consultants, accounting firms, etc. charge.
Agencies work on a very different basis than solo freelancers/contractors, including (but not limited to) the fact that on the bill, there are hours of many people involved.
> My point is that, from my experience, "per day" is strictly better than "per hour".
This seems to be a popular and strongly-held opinion on every thread about consulting on HN, but I don’t get it. If I spend 12 hours on-site with a client, I bill them 12 hours, not 1 day. If I decide to take a couple of hours off to walk the cat, I don’t bill the time and don’t feel guilty.
I absolutely refuse to be a “contractor” or anything that looks like “staff augmentation”.
Strategic consulting where I am talking to decision makers and people in control of budgets where I’m brought in for expertise is different.
When I was a dev lead and saw the difference between what we were paying “consultants in name only” staff aug C# developers and what we were paying “AWS consultants” who were just old school net ops folks who knew how to duplicate on prem infrastructure and processes and make it more expensive in the cloud, it changed my entire career trajectory.
I knew I could bring more to the table as someone who had a development background, knew some about infrastructure if I knew “cloud”.
I got a full time job at AWS in the Professional Services department where I still work. ;)
And I stay away from any project where it looks like it’s going to be staff augmentation.
I want to have clear objectives and clear definition of done with success criteria not “the customer bought a bucket of hours and they will add you to their team and assign tasks”.
In certain Latin American countries if 90+ Oct of your revenue comes from a single client, the tax office determines that this client is de facto your employer and you become entitled to severance and other perks when you leave or contract is ended.
But I don't want severance and other perks. I just want money so I can save up my own buffer and buy my own perks.
I think it's very good that the tax service is looking out for underpaid freelancers struggling on the edge of poverty (or often below it), but highly paid software engineers can take care of themselves. If my current client wants to end our contract tomorrow, I'm fine with that. That's why he's hiring me, and not an employee. And that's why he's paying me as much as he is.
I'm all for drawing a line somewhere based on hourly rate. Below $50/h (or wherever you want to draw that line), you may be entitled to employee benefits, above that line, you're on your own, because you can take care of yourself.
I don't think the pay rate really matters, and you could always decline it. I think this is more meant to safely allow someone to put most of their eggs in one basket - generally that's a risky move and the client could simply refuse to pay and put you out of business, but as a client there's a lot of value in being the main priority
If you can put in the effort to get good (better than average) at one marketable skill, present yourself well, and commit to it, you'll do ok as a contractor/freelancer.
Good communication is 80% of the job for sure. Managing expectations is your own secret weapon. A good communicator can give themselves plenty of time and the client will be happy about it. Poorly communicating timeframes will have people distrusting and frustrated, and you'll be under pressure to boot.
Lots of good, valid information in this article. After more than 10 years in this field I would add, that it can be beneficial to do the book keeping yourself. It is useful to get a feeling for your numbers and expenses which helps you when doing financial decisions.
Can we separate out the phrase "Consultant, freelancer or independent contractor"? It encompasses both experts with deep knowledge in some lucrative niche, as well as wordpress devs on upwork making $5/day. Not to mention "normal" programmers who are indistinguishable from employees, but get paid hourly for some reason (often because they are in another country, but often because they are being taken advantage of).
Many programmers prefer hourly pay over proper employment. As contractor, I can put hardware, my rent, and leisure travel into expenses. Real taxation is 15% versus 45%. I can have multiple clients...
Not really. I can visit conferences, apply for new gigs, market research... There are limits, but if you are not greedy, it is perfectly fine. Bringing gf, renting cars, beach stay... would ruin it.
It varies by trip but if I take a business trip somewhere interesting I'll routinely tack on some personal time. But, even if I'm not adding days, I'll try to make a little time to explore a place.
I’m surprised you’re able to expense your rent, but otherwise I agree. I like being free to arrange my schedule how I like. I’ve traveled almost 3 months out of 7 this year, take long weekends to go diving, etc. When I was W-2, even when I ostensibly had unlimited PTO it always felt like I was begging for my own time.
In Canada there is some complicated formula for how much you can expense rent, based on the floor size of your office compared to that of the living space in your home and how much you use it for working etc.
When my partner applied for it, it ended up being a ridiculously small amount.
My accountant in the US always recommended against it because it is a red flag. And, yeah, it would be one room in my house and not dedicated for work purposes so it wouldn't be a big deduction. When I had a part-time software business it made more sense to just find reasonable deductions I could offset against my revenues.
Technically I still live with my parents, but one of my clients requires me to maintain office 300km away. There is no trick, I asked at tax office if that would be OK.
Including "consultant" in this list muddies the waters very badly. Freelancing and independent contracting are forms of entrepreneurship, whereas consulting is often (not always) a form of traditional employment where a regular company gives you a regular paycheque.
As a programmer, it's always a few months of work before the client stops spending on development. At that point, I can go up to 3 months without work, which means high anxiety because if I wasn't able to save much, I have to scurry around trying to find work. Sometimes I get a referral or two but it'd be nice to have about the same stability as being employed.
How do you programmers here manage to land a constant amount of work while freelancing?
With or without a family, the reality is that you work in spikes.
You have times where you work much less than that on client projects, maybe just 50% of that, and use some of the "free" time to tinker, learn, improve your internal tooling etc. And of course spend more time with family and friends.
Then there are times where you have to squeeze in as much (billable) work into a week as possible. Deadlines need to be met, quality & testing needs to be rock solid.
Then there are times where you spike up with work and start neglecting family and friends. It's just how it goes. No amount of planning can prevent these spikes completely.
I'm sure there are exceptions, but generally you are in part hired for your flexibility and high engagement. You give certain guarantees that employees don't and you make absolutely sure that those expectations are met.
But again, it's an ebb and flow thing. Or it should be. There needs to be times where you decompress for a while, look at the big picture and sharpen your tools.
I live in Europe as a subcontractor and I work 32 hours per week. That's billable hours, which excludes travel/commute, bookkeeping, trainings, and searching for new projects. It works fine with family. I do my own bookkeeping and taxes.
> How to be a Consultant, a Freelancer, or an Independent Contractor
It's important to note that:
- Consultant
- Coach (added by me)
- Contractor
- and Freelancer
Are four distinct species, if you will. These titles are typically used interchangeably. That's a mistake, often a costly one.
Furthermore, the key is to find fit with clients'/projects' needs and expectations. For example, the client - not knowing any better[1] - could say they're looking for a freelancer, but what they really expect is a consultant or a coach. Or you anticipate a steady contract engagement and it turns out to be more on/off freelance-y and in order to be available to this "great client" you end up leaving hours on the table. And then the client ghosts?
[1] Or because they know a freelance rate is lower/lowest, and then will effectively demand more and better because they can, not because that's what they agreed to pay for.
I've been working a consulting contract for the last 4 months or so and I am definitely under-billing and over-delivering big time. I'm charging $58/hour for Django development and I've built these guys a nice backend with a rock-solid test suite. I also have almost 20 years experience as a software developer now, and I'm giving them high-level design and architectural guidance as well. I have no idea what they'd do without me at this point. I like the flexibility, but I think I'll need to start making a bit more money soon. It is just such a headache going through the whole interview process, though.
Why not try to work for the company you are consulting with, but negotiate a raise in your hourly rate? You've basically already served a probationary period, and if you've shown how good you are it should be a no brainer for them. $70 to $100 an hour or $140k to $200k a year would be reasonable given your experience level, of course depending on the cost of living justification.
Yeah, I think I'm easily worth $85/hour, maybe even $115/hour. But I don't want to try to negotiate until I have another $10k of savings and I have a couple of leads elsewhere so that I have a bit more bargaining power.
Are most consultants/freelancers/contractors generally working on product-side or customer-visible projects?
I have always been interested in going this route but for backend dev / infra / build/cicd kinds of things. But how can one sell or advertise that which isn't "seen" by customers unless something breaks catastrophically?
Freelancer here. I'm just a data point of one, but I work on all kinds of projects, both product-side and customer-visible. For the "invisible" (to the customer) work, you can always add a description of it to your CV (along with some suitable graphics to show, for example, performance or positive outcome).
Occasionally I'll show the front end of the project, even though I didn't work directly on that part, simply because it's what potential customers understand and identify with. I try to make it clear what part I worked on, but when I'm using it in a portfolio I sometimes leave that to the imagination of the viewer, until I'm actually speaking with them about their potential project.
Counterpoint: definitely bill “learning on the job”.
That learning leans on your knowledge and expertise that you have accumulated over the years. That is worth paying for. No consultant ever had all knowledge beforehand and any client claiming they should are not worth your time.
> Work 6 days per week. Use that saturday to work on things that are harder to do during the week because of interruptions.
In my own case I haven't found it necessary to overwork. In fact, if overworking was the only way to make it I'd probably become an employee. My current schedule is 4 days / week, consisting of 8 hour work days. Three of those days are for billable work, one for other stuff (bookkeeping, sales, blogging, keeping up with HN :P). I plan to write a proper article with more details by the end of this year, when I feel I have enough things to tell.
Often reading HN. Not kidding, I spend down time surfing sites containing everything from news to coding advice. At any time I'm either developing, learning more about development, or learning more about industry happenings. Once in a while I'll check in on something like Facebook, but that's only about five minutes a day.
* Your price sends a signal that attracts particular clients, and the ones you attract with lowball prices are the worst, most demanding kind.
* Your ordinary good clients aren't shopping on price, beyond a vague notion of what the normal range of prices for your field is. Remember: they're generally not spending their own money.
* Any client big enough to have a purchasing department is never going to let you get your rate back; their whole job is to prevent vendors from ever raising rates.
* There are a zillion things you're selling as a consultant that you don't realize you're selling, from schedule flexibility and freedom to fire at will to answering phone calls about the project deliverable 3 weeks after the project is done to not having to pay benefits and payroll taxes to documentation, and you're much more likely to forget to capture this stuff in your prices than you are to overcapture it.
I'm not sure I've ever met a new consultant that had unrealistically high rates. But most new consultants I've met have had unrealistically low rates.
If a client balks at your rate, you can still get the project cost where they need it to be: negotiate on scope instead of rate.
Never bill hourly. Hourly is cursed.