Take the 2-minute tour ×
The Workplace Stack Exchange is a question and answer site for members of the workforce navigating the professional setting. It's 100% free, no registration required.

I've heard many people mention that as a contract software engineer you can make 20-30% more per hour than if you were salaried - because of no benefits. However, when I look at contractor rates on sites like glassdoor.com for senior positions, I see very low hourly rates. So my question is, for the following position at a big company (say Microsoft) in silicon valley, is there anyone who can attest that he/she actually makes much more as a contractor?

Title: Senior Software engineer Experience: 8 years Salaried offer: $125K+ benefits

This salary should translate to about $85/hour as a contractor. Is there anyone who makes this much or more? I've seen figures of $100/hour and even higher, but everytime I talk to a contracting firm, them seem to be maxing out at 70/hour?

I have to make a really important decision very soon and I've searched all over the net and can't find a solid answer. I'd appreciate if people can give me some answers here rather than a lecture on ethics.

share|improve this question
4  
Are you asking "Do there exist contractors that make more than $100/hr"? Are you asking "Are there contractors at some particular big company that are making $100/hr"? Are you asking "Would a large company be willing to hire me as a contractor at $100/hr rather than as an employee making $125k/year?" Or are you asking something else? –  Justin Cave Jun 13 '12 at 23:51
    
What I'm asking is do companies actually(normally) pay 20-30% more per hour to contractors than salaried employies because the offers I'm getting (salaried vs contract) don't back that up. –  tunafish24 Jun 14 '12 at 0:00
    
One thing you are missing in your formula is that most salaried people don't get overtime, and most IT people work it in spades. –  JohnFx Jun 14 '12 at 2:29
    
I find contracting works well for me when I do it on the side for disposable income and I can work from home. Even if the client is an absolute trainwreck that is floundering in the tarpits of their own incompetence and treats you like money sucking garbage, I am still happy with this because I don't need the money and I hold all the cards. I generally figure about 30% of what I would make on salary (10% federal, 15% ss taxes, 5% state and local and then of course if you are 1099 you can write off business expenses Eg. new computer, mileage+wear and tear (.55/mile this year!), software, etc –  maple_shaft Jun 14 '12 at 11:11
    
And remember the salary is highly dependent on the geographic area of the job. If you aren't in the Silcon Valley you can't count on their level of salary. The consultants who make the most are also highly skilled, you may or may not qualify for those types of positions whcih is why you are being offered lower rates. –  HLGEM Jun 14 '12 at 15:28

8 Answers 8

First of all, in the US in the IT area, there are essentially two types of contracting.

The first, usually called W2, means that you're an employee of the contracting agency. They handle the billing and other overhead, pay payroll taxes and usually offer benefits (quality varies by company). They bill the client, usually about 50% or more higher than what you'll see. For example, they bill the client company $80/hr for your time and pay you $45/hr.

The second, usually called 1099, corp-to-corp or freelance, means that you typically work directly for a company on a contract basis. Occasionally, you'll go through an agency but most people working this way prefer to cut out the middleman when possible. You bill your hours, pay all the taxes and don't have any benefits. The good part is that if you bill the client $80/hr all that money is yours, at least until you have to pay taxes (quarterly). Most people I know who work this way have a spouse who has benefits through their job.

In general, you'll see about 20-30% more on an annual basis as a W2 contractor. As a 1099 contractor, you'll see about 50-75% more although most of this goes for taxes and often you'll end up making less than the comparable W2 position once Uncle Sam and your state get their cut.

Other downsides of working as a contractor you don't get paid vacation and you're typically treated as disposable goods by the client. You can become the fall guy for regular employees if things go bad, even if they aren't your fault. You're likely to work less than 50 40 hour weeks in a year so you make have unexpected dry spells between contracts/projects. Even as a W2 contractor, but especially as 1099, you accept more risk and usually harder work for a higher monetary reward.

Lastly, as a contractor of either type, you're most likely to find yourself working in a standard corporate environment rather than with a Microsoft/Facebook/Google type company. You'll probably be doing jobs like maintaining old apps, doing work that the client company's employees don't know how to do or being brought in as a last minute replacement/addition on a failing project.


One more type is the contract-to-perm position. In this situation, a company wants to hire you but they want to give you a trial run as a contractor first. Since it's easier and less expensive for them to drop a contractor than to fire an employee, many companies use this. Typically, this is like the W2 contractor with a set hire-by date.

share|improve this answer
1  
You said 1099 contractor makes 50-75% more but most of that goes in taxes. The only tax difference I find is that 1099 guy has to pay about 7.5% more for Social Security and thats it. Am I missing something? –  tunafish24 Jun 14 '12 at 5:54
1  
@tunafish24: In the US besides the Social security taxes there are other costs that the average employee doesn't consider. Besides benefits like insurance they have to realize that if you can't bill the hours, you don't get paid. So vacation, holiday and sick pay must become a percentage of the rates you bill. That eats into the 50-70%, but they aren't taxes. –  mhoran_psprep Jun 14 '12 at 11:00
1  
@jfrankcarr: Are you sure that 1099 have to pay unemployment taxes? I couldn't confirm that online. AFAIK, 1099 don't get any unemplyment benefits, so I don't see why they would need to pay that tax. In case of W2's, employer is supposed to cover that, so it's not included in the rate at all. –  tunafish24 Jun 15 '12 at 20:54
4  
Having cash instead of 401k when young is a mistake really but thats a whole other issue... –  Rig Jun 18 '12 at 13:38
1  
@Rig - Some W2 agencies offer 401K plans as well but they're generally inferior to regular corp employee plans. I agree that investment is essential and a 401K is about the easiest to handle for most people. –  jfrankcarr Jun 18 '12 at 14:16

I'm a full-time contractor and I do make more per hour than I could at a company, but I'm not getting my contracting gigs via sites where you shop for gigs - it's all word-of-mouth and personal contacts that I developed by working full time in a marketing agency. If you don't have those kinds of contacts and experience, the higher rate may be harder to get and keep.

I also agree with all the people who've pointed out that the higher rate does not equal a higher annual income due to taxes, health insurance and the time you don't work. But, I personally switched over for the quality of life and that makes up for all of it. I love working from home and getting to choose when and how much vacation I can take, albeit unpaid. Not to mention choosing my clients being able to stay fresh by taking on new projects rather than spending most of my time maintaining older code.

Best of luck with your decision!

share|improve this answer
    
You've nailed it! That's exactly the reason why I want to work as a contractor. Tax-wise I only see a 7.5% increase, so if I'm making 20-30% more, then after working 10 months I should have enough money saved, that I would had I worked 12 months. That leaves about two months to take a stress-free vacation and look for another contract. Not to mention time you can learn new skills etc. –  tunafish24 Jun 15 '12 at 20:47
    
Remember that you may not be working 8 hours a day every day, though - there are some weeks I only work a few hours a day, some where I work 10+. So the two months of vacation time may be reaaallly spread out and not exactly of your choosing. BUT, if you're the kind of person who can flow with that unreliability in terms of steady monthly income (it really stresses some people out) I definitely recommend it. Plus you can of course take your work on the road as you never have to go into the office. :) 'Luck! –  Michelle Jun 16 '12 at 0:25
    
One thing to consider is that while freelancers get to work from home and choose their work hours fairly often, W2 contractors are usually expected to be in the office during certain business hours to get paid. –  jfrankcarr Jun 17 '12 at 21:43
    
@Michelle: Yea, I'm pretty comfortable with money not coming in for a month or so, as long as I make up for it during the time I'm working. I guess, like you, I prefer free-time between contracts over a steady job. –  tunafish24 Jun 19 '12 at 6:45

Yes, there certainly are cases where companies pay 20-30% more per hour (and often much more than that) for consultants rather than employees. Of course, if you go through a consulting company, the consulting company will take a chunk of that because they handle things like marketing, generating leads, billing, etc. and may offer some benefits. If you want to maximize your per hour pay, you'll want to do all of that yourself-- of course, that means that you'll need to spend lots of time doing things other than being a software developer.

If you are in the United States, make sure that if you go the contracting route, that you'll be responsible for your own health insurance and self-employment taxes (the employer portion of Social Security taxes) that will easily eat through 30% of your income (hence you probably want more than that). And that's before you add in things like insurance, lawyers, accountants, retirement plans, holidays, vacations, time between contracts etc. Plus, you'll be doing lots of non-software development work on the side so you'll have to be good at sales and marketing, negotiating contracts, managing client relationships, and everything else that comes with running a business in addition to being a good developer.

And, of course, that assumes that the company is happy with either an employee or a contractor. For most roles, companies prefer one or the other. Generally, companies want to have employees for long-term open-ended projects and wouldn't want to have a contractor for that sort of role. On the other hand, if companies are looking for particular expertise for a particular project over a particular period, they'd rather have a contractor rather than an employee that they potentially have to fire or find a new role for when the project ends.

share|improve this answer
    
Yes, I suspect it's the agencies keeping a lot as their cut. I've thought of going solo, but the obvious problem is finding a direct contract position. Almost all of the contract jobs on dice are by consulting companies, is there any other website that's good for finding direct consulting positions? –  tunafish24 Jun 14 '12 at 5:57
    
@tunafish24 - Most positions that you'll find advertised are positions through other companies. If you want to be a freelance developer, you'll need to invest a lot more resources finding these sorts of positions-- you'll need to be your company's sales and marketing department in addition to being a developer. –  Justin Cave Jun 14 '12 at 15:35
    
I agree, looks like I'd have to establish some contacts before I can get to the magical $100/hr. Another thing, I've noticed is the non-compete clause that many agencies have, how easy is it to get them to remove that? –  tunafish24 Jun 15 '12 at 20:56
1  
@tunafish24 - If you are intending to be a W2 employee of the consulting company, likely very hard, at least assuming that you're talking about the clauses that prevent you from working for other companies simultaneously or working for customers of the consulting company later in a 1099 role. –  Justin Cave Jun 15 '12 at 20:58

Absolutely they make a ton more, much more than 20-30% !

Of course if they use an agency which takes a cut they get to keep it all!

Other than that they just have to pay their own health benefits. Plus cover their own vacation pay. Plus 401k. Plus training costs in new tools. Plus Dental. Plus accountant. Plus some clients that don't pay / go bust. All sorts of fun stuff ;)

Been there, done that, didn't like it much.

share|improve this answer

A smart contractor will adjust their fee to consider, taxes, insurance and other costs to make sure they have a certain amount of take home pay.

You also need to consider the short-term and long-term advantages and disadvantages to both the contractor and the company doing the hiring.

  • short-term projects may pay more per hour, but the company spends less than having a full-time employee who they don't have full-time work to do for a full year.
  • flexibility in expertise. The time it takes to find one person who can do it all can be much longer than finding 3 contractors with specific skills and are willing to work for a few months each on a project.
  • contractors have to charge more per billable hour to compensate for the time they have no work. Bottom line is you have to make enough over a period of time.
share|improve this answer

Sorry, this is probably a year too late but a friend who worked in Procurement at a large company managing staffing (where i was a contractor making below avg rates!) told me this.

Large companies try to keep contractor costs in line by looking at and standardizing the titles for the common type of contractors they hire. Then they negotiate volume discounts with consulting and staffing companies for these titles. Obviously the contracting companies out-bid each other and offer low rates to get the business and then when they get the requirements they have to try to supply the least qualified and lowest cost contractor that barely meets the minimum bar. This is probably why you are see the lowball offers. They don't mind spending a few extra days looking for someone less qualified that will work for a lower rate.

However the smarter managers in large companies have figured out if they really want high quality resources- they have pay more and bypass procurement and the system- by stating that the skills required for their projects are very different than the standard. Then they seek out previous co-workers, contractors they worked with, or niche companies that have high skill contractors- that are approved to work in their company and pay the 20-30% higher rates you heard of. So, in short - the higher rates exist but are not easily found and are not widely available and are exceptions. You'll just need to be patient and wait till someone needs you badly and is willing to pay or you can check OnContracting for a list of approved staffing agencies for large companies and seek out the niche agencies in your target large company.

share|improve this answer

I would say that piece of wisdom applies more to typical IT shops than to software companies.

The typical situation is an IT shop at a company that makes widgets, and has some software that is a "cost center." They want to have a base of employees who can support their systems, and aren't terribly likely to move any time soon. Occasionally, they will have projects where they will need to ramp up their staff or acquire a specific skill set. Or they may like to have a "buffer" if they need to cut expenses fast without risking the hassle of laying off employees.

In this case, the typical contractor will be making more than the typical employee. The trade-off is for stability. If there are budget cuts, the contractor will likely go before the employee. On the other side, the employees' skills are likely more localized and domain-specific than the contractors', so they may not have as much leverage to negotiate raises, etc.

Again, there are exceptions, but I think this is a rough picture at your typical IT shop.

--

For companies, that make software as their main business, the model is a little different. They want talent, and are probably willing to pay for it, and may not be as concerned as an IT shop about costs, so they're working off a different model.

share|improve this answer
    
Good point about IT vs Software contract jobs. I've noticed that as well, IT consultant are hired to do the dirty maintenance work, whereas software consultants are mostly employed for a specific skillset. –  tunafish24 Jun 15 '12 at 20:49
1  
True, it's pretty rare for a software company to hire contractors, other than contract-to-hire to give someone a test drive. Usually contractor jobs are maintaining an old CRUD app while perm employees work on the new exciting stuff or you end up being the extra manpower being thrown into a failing project. Occasionally, you'll get new work but this is relatively rare. –  jfrankcarr Jun 17 '12 at 21:47

Title: Senior Software engineer Experience: 8 years Salaried offer: $125K+ benefits

This salary should translate to about $85/hour as a contractor.

I don't understand your math... 85$ per hour * 48 weeks (4 weeks vacation) =163K, say you have excellent benefits valued @ 15k (excluding vacation) you are now at 148K

Much better then 125k (Almost 20% more) ... Even if you are 1099 and need to pay an additional 7% in taxes...

+ Paid overtime!

share|improve this answer
    
What I meant by translate was that after about a 30% increment, it should be $85/hr. That's what I've heard, account 20-30% for benefits. –  tunafish24 Jun 19 '12 at 6:48
    
You're missing a very important factor. You don't always get to bill 8 hours a day, 5 days a week when working as a contractor. That will significantly reduce your 163K figure. –  CadentOrange May 8 '13 at 10:09
    
And sometimes as a contractor you get to bill for more than 8 hours a day 5 days a week. I once worked on a project where they brought in a contractor to fill a slot they couldn't fill otherwise. He billed us 40+ hours per week and had another project going as well. He made more money in the 3 to 4 months we worked together than I did in a year at that time. –  GreenMatt May 28 '13 at 7:46
    
Actually, $85/hour for a consultant equivalent of $125k/year is cheap...the consultant has to pay for the following things (that an employer typically pays for) : health insurance, other benefits (like bonuses and 401k matching), lack of work as others already mentioned, rent, computers and other equipment, etc. The actual rate a consultant needs to charge is typically in the 2-300% or the nominal salary, i.e. for the $125k normal salary a consultant should be charging $120-$180 an hour, at least...the $125k as an employee is a better deal than $85/hour as a consultant! –  daaxix Oct 28 '13 at 19:17

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.