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Contractors Aren’t Employees, so if You’re a Contractor or Freelancer, Don’t Count on Your Clients to Look Out for You
She wrote with exquisite, even painful, candor and vulnerability of how she was betrayed, when her direct client failed to pay what she was owed.
“…all came crashing to a halt when the money I was promised never came. It was coming on Monday, Tuesday, possibly next week, and I’d sit in my home, seized with anxiety. Watching the contents of my fridge dwindle. Counting the pills I had left to take…” — Felicia C. Sullivan
Then there was this, by someone who apparently should have been classified as an employee, but was denied the benefits and protections of an employee by the “client” company.
“… as an independent contractor for … seven years as a salesperson for a large national flooring company… I averaged sixty-hour work-weeks. Yet, since I wasn’t an employee, I was denied benefits. … The company… requir[ed] us to register as LLC’s. This way, they could say we weren’t employees, we were business owners… we were required to drive our own vehicles to sales appointments without reimbursement for mileage, maintenance or gas. The wear and tear on our cars meant we constantly needed to replace our brakes, tires, and even the vehicles themselves. These expenses, although incurred on behalf of the company, had a way of coming at the worst time and depleting a person’s savings account.” — Tamara Gane
If you think being a contractor or freelancer is a walk in the park, realize that the park is full of predators, snakes in the grass, and hidden pitfalls.
Think your clients will look out for you?
Think again. In many cases, they are those predators or snakes, as Ms. Sullivan found out; they are the ones who dug those pitfalls and covered them with branches, so you wouldn’t see them until after you were trapped.
There Are a Lot of Freelancers and Contractors
If you believe Upwork and the Freelancers Union, there are as many as 55 million freelancers in the US, about 35% of the workforce. The Bureau of Labor Statistics (BLS) says it’s only about 10% of the workforce.
How to explain this huge discrepancy? Upwork/Freelancers Union included anyone who had done any contract work during the previous year, based on a sample of people who signed up for surveys (probably not a representative sample of the population), while the BLS asked people if they’ve done such work in the past week. As Inc.com states, the answer is likely somewhere in the middle.
The important point is that whether it’s 15 million or 55 million, there are a lot of Americans who work without the protection of the laws written to prevent the worst excesses of employers.
Freelancers and Contractors Have No Employer Benefits…
As a self-employed consultant for the past decade, I know full well that contractors and freelancers don’t get the benefits that full-time employees get (as Ms. Gane learned). Benefits that include:
- Paid annual leave, holidays, and sick leave
- Health insurance plans
- Short- and long-term disability insurance
- Employer contributions into retirement plans
- Employer contributions for Social Security and Medicare
- Company vehicles, laptops, software, cell phones, and cell phone plans
The rules of the road are simple:
- If you don’t work, you don’t get paid.
- If you need a car, equipment, tools, software, insurance coverage, accounting/bookkeeping support, etc. to do the work, it’s on you.
As a contractor or freelancer, the rules of the road are simple. If you don’t work, you don’t get paid. If you need anything to do the work, the cost is on you.
… However, that Doesn’t Mean You Can’t Shift the Burden
What happens if suddenly farmers charge grocers 50% more for eggs and milk? The grocers will turn around and raise their own prices on those items, shifting the burden to the consumer.
That’s well and good for milk and eggs, where people almost have to pay whatever they get charged. However, there are lots of other items that people don’t have to buy, where consumers won’t accept a 50% price hike. When supplier prices on those jump by a large fraction, stores stop stocking them, or they raise their prices in several smaller steps, meanwhile increasing prices on other items and/or reducing costs elsewhere, to make up the shortfall.
If you want to succeed as a contractor or freelancer, you have to think like a business owner. Are your costs higher? Increase your rates. Can’t work as many hours? Again, increase your rates.
If clients won’t pay the rates you have to charge, you need to pivot to different clients, different services, or both.
If you want to succeed as a contractor or freelancer, you have to think like a business owner.
Charging What You Need to Charge — a Primer
To be successful, you have to know what you need to charge, before you even start talking with a prospective client. Here’s how you do it.
Your Supply Situation
First, you need to know your “supply” situation. How many hours can you work? There are 52 weeks in a year, so at 40 hours/week, you nominally have 2080 hours.
However, life happens. You get sick, want to spend the holidays with the family, or have to take time off to recharge and avoid burnout. That’s why I suggest you don’t count on more than 48 weeks per year. Multiply that by 40 hours a week and you have 1920 hours to work with.
If you have to do your own marketing, have to drive to and from your clients’ locations, have to go shopping for work supplies, all these take away from that 1920 number. However, for this exercise, let’s assume that you can work all 1920 hours, and that you have willing clients for all those hours.
Next, let’s assume that you plan to charge $50/hour.
Multiply that by 1920 hours and you get a $96,000 annual revenue.
Determine Your Expenses
Note that I said revenue, not income. That’s because now you have to subtract your business expenses. Say you have to drive 860 miles a month for your client. At the current mileage rate (which is estimated to cover gas, maintenance, insurance, depreciation, etc.), that’s worth just over $500 per month, or $6000 for the year. If that’s your only expense, your profit is the remaining $90,000. If you have more or different expenses, use those instead.
Determine Your Self-Employment Taxes
Next up are self-employment taxes. Since you’re self employed, you have to pay both the employer and employee side of those, or 15.3%, taking you down to $76,230.
Determine Your Savings Set-Aside
Want to ever be able to retire? You need to set aside money for retirement. If you want to be able to take care of emergency costs such as a hospital stay or replacing your car, you should also set aside money in an emergency fund. Let’s say that’s a total of $16,230 (just over 20%), to make the math easier… and now you’re down to $60,000.
Determine Your Income Taxes
Next step is to figure out your income taxes. This depends on many things including:
- Where do you live? California has the nation’s highest state income tax, while Texas charges no state income tax, so this is important!
- Are you married?
- What other household income do you have?
- How much can you deduct? The standard deduction as of 2018 for a married couple is $24,000, but if you have lots of deductible expenses, you might prefer to itemize.
Between these and other potential factors, you need to consult with an accountant or use tax-prep software to estimate your income taxes. For our purposes here, let’s assume it’s a total of $12,000, leaving you $48,000 to cover a year’s worth of expenses (or $4000/month).
Your Rent or Mortgage Determines if You’re Charging Enough
If your rent or mortgage payment is $2000/month, that $4000/month will be a really tight squeeze, so you’ll need to charge more than the $50/hour we started with. With a housing cost of $1000/month or even $1300/month, the $4000/month might just do it.
Clearly, the $50 hourly rate we started with was made up. If you’re paid $15/hour, the above numbers worsen dramatically. Charge $150/hour and things look a lot prettier.
If you want to start figuring out what you need to charge, have a look at a formula I wrote down to help you figure out the rate you should charge.
The Bottom Line
The point is not any specific number that I can come up with or the arithmetic I did above. All those were just an example to show you what you need to consider.
The point is that before you start discussing any freelancing or contract jobs, you have to calculate what hourly rate is a livable wage for you given the details of your situation, including your work-related expenses and your personal budget.
Ask for what you’re worth, what you need for this to be sustainable.
If you’re offered less, demand more.
The client refuses? Walk away and find a better client.
If you don’t have any better options, you may have to take this gig temporarily, but then find a side gig to make up the shortfall. I know, working more than 40 hours a week for very long gets tiresome, but sometimes we don’t have good options so we have to go with the least bad one. Alternatively, economize on your expenses, then start looking for better clients, services for which you can charge more, or both.
Remember that even if your client is a nice guy who won’t scam or abuse you, nobody will look out for you as well as you will, so it’s up to you to do a good job looking out for yourself.
This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the Author
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.