Do Software Engineer contractors really make more than salaried engineers? [closed]

Question

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.

Answer 1

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.

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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.

Answer 2

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!

Answer 3

You asked if contractors take home more than the equivalent salaried employee.

It depends.

Many freelancers/contractors charge too little, resulting in them working for less than the equivalent employee.

The following costs must be accounted for accurately in order to compute an hourly rate just to keep you on par with the salaried employee

• G & A (this is accounting speak for computers, software costs, office space, electricity, rent, travel, professional development; things you cannot charge a client for directly)

• Overhead (this is mostly labor that you cannot charge to a client, but sometimes includes things I stuck in G & A above)

• Fringe benefits (this is retirement, health insurance, liability insurance, workman's comp, taxes, paid time off)

• Profit (you need a little of this, you are taking on some risk by not being permanently employed)

Furthermore, the G & A + overhead costs for a contractor are high because contractors typically only work between 20 and 30 hours per week. If you are billing by the hour, you can only bill the actual hours worked for a client.

Fortunately for this answer, I recently finished a contract where the scope of the work which I was hired for was equivalent to an engineer in the $115-135,000 annual salary range. I just happened to pick $125,000 as my break even calculation number. Note that I live in Arizona, USA.

For this calculation I lumped G & A and Overhead costs together, since for me they are really the same thing when working out of my home office, and I don't have any other employees.

My annualized costs were :

• G & A + Overhead : $23,000 (note that this is with no rent, but includes computer upkeep and software licensing, travel, phone, accountant, invoicing software, and other test hardware)

• Fringe Benefits : $43,000 (this includes health, all taxes, liability insurance, etc.)

The above were actual costs.

Now I need to calculate the hourly rate. To accomplish this task, I need to compute how many hours per week that I work on an annualized basis.

I actually worked about 30-32 hours per week on the contract, the rest of the time I was working on billing, accounting, hour tracking, task reports, etc. (all unbillable to the client).

I also need to remember vacation for this calculation, and I'll use 6 weeks of paid time off.

My total billable hours were (52 - 6) weeks*32 hours/week = 1472 hours.

My total costs were $23,000 + $43,000 + $125,000 = $191,000.

This means that my hourly rate must be $191,000/1472 hours = $129.76/hour, just to break even!

This is the no profit rate.

This rate is 2.16 times the 40 hour equivalent of $125,000 per year ($60.10/hour), which is much higher than the OP's 1.3-1.5 multiplier.

Before contracting and setting a rate, you need to figure out all of these costs for yourself, then do the above break even calculation.

Some things you must pay for are :

• Software for commercial use (sans alternatives)
• Taxes
• Various insurance (depends on location)
• Hardware, electricity, internet, etc. for your business

but other costs are up to you. I refuse to go without health insurance, for instance.

If you cannot close contracts at more than the break even number (for hourly billing), then you should attempt to obtain a regular salaried position.

If you choose to not include benefits, retirement costs, etc. in your calculations, you are effectively working for below market rate.

Answer 4

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.

Answer 5

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.

Answer 6

You're comparing apples to oranges.

A W2 person is guaranteed* her 2,080 hours per year, so if her $100k annual salary were translated to an hourly rate that would be just a hair under $50/hr.

This doesn't translate to the Contract World.

As a contractor, I have to bill double that rate, minimum, to maintain the same lifestyle. So, we're talking $100/hr. This is because I assume I'll only have 1,040 billable hours per year, due to illness, vacation, dry spells and time spent beating the bushes for new clients.

Of course I pay more taxes, and get no benefits. But I get to deduct my mileage, computer, phone, home office (in a separate building, thank you), accounting fees, etc.

Now let's answer your REAL question -- the one you didn't ask: "How do I make more money?"

The answer is you provide enough value so that someone is willing to pay you the amount you want for your services. If you can't provide that value as an employee, you sure as sand won't be able to do it as a contractor.

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*Assuming a perfect world without crazy bosses, predatory corporate culture and M&As.

Answer 7

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.

Answer 8

If you want to go independant in IT, there is definitely the needs for. I would choose my clients more into the small and medium sized companies (50 to 200 employees, making about 20 to 200 million dollars revenue a year). They usually lack of expertise in specific area of IT.

It is easier if you know people in th eindustry of course, especially in boutique consulting companis. They usually charge clients around the 150 to 200 dollars an hour and they give you back from 100 to 150 dollars.

The clients are usually reasonnable and the projects are interesting.

I have started being independant this way and clients loved me enough to pursue working with me way after my relationship with consulting companies, some CTO going from companies to companies.

Do not discard developers you meet a client's onsites, they will be your allies in different companies in the future because they will go to different companies and will tell about your expertise to their bosses.

I have been fortunate in having clients this way, remotely and I think they are definitely room for independant contracting.

Rate wise, I have been offering my services from 40 dollars to 175 dollars an hour, and I do mostly 125 dollars an hour. It depends how much you want to work for. You can work definitely for 300K a year but you can also do 75K, depending on how much you want to work and depending on where you live (purchasing power, ability to find job onsite, etc...).

I think being independant in the US is a tough choice because there is not much edge besides maybe 20% benefits you do not get. Competition for the employees are low because they can get fired easily. I am leaving in France and it is actually interesting because being independant can offer more work because employers do not need to have the burden to hire someone they have to drag potentially. It is less risky and it is actually cheaper as benefits in France (social charges mainly) are a real buden for the companies. Additionally, working for 125 dollars an hour from France, comparing to the purchasing power is not that bad.

Considering working from a remote country where the purchasig power would be good, if there is good internet might be something to think about...

France might not be the best choice of course but this is because of my family and quality of life choice but there are probably many choices you can do: working from Costa Rica, Spain, Gualapogos Islands, etc.... you name it. This is another decision that can be handy.

Answer 9

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.

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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.

Answer 10

Others have already added plenty of information about this. But, I think they missed one point. Sometimes, contractors can earn far less than their potential because of the practice of sub contracting, i.e getting a job through a middle man or vendor. In fact, I had recently created a question about this. Often, the jobs offered by these types of contracting/staffing agencies are of the maintenance or "labor intensive" type i.e not much thinking, designing and problem solving.

Here is an example:

Company = + $100/hr
vendor1 = - $16/hr (preferred vendor)
vendor2 = - $8/hr  (middle vendor)
vendor3 = - $8/hr  (middle vendor)
contractor = 100 - (16+8+8) = $68/hr

68 $/hr or 140,000 p.a might be quite good for those living in most big cities if you are single or are married without kids. But think about the extra money every one could make/save by removing middle vendors !

Most importantly, your rate depends on how skilled you are. Assume that there is a strong demand for your skills in the market. Then, the rate you get primarily depends on your skills and secondarily depends on your visa status. If you are really skilled, then you can easily negotiate for a higher rate. Unfortunately, if you are on a short term work visa or need one, then don't be surprised if you get low ball offers. Highly skilled people might not face this problem often, but average skilled ones will. Unfortunately, visa status is used as a bargaining chip by many companies.

Takeaway: Try to find companies that work directly with clients, i.e don't have middle vendors.

Answer 11

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!

Answer 12

It used to be (especially in the 80s) that if you were a consultant (ie, a true freelancer) you could take home more money than salaried software professionals. Even now, in some cases, if you work in a 1099 basis, you can make 20-30% more...but you don't actually make more, because 1099 workers have to pay their portion of social security insurance, AND the portion that a W-2 worker's employer would normally pay.