dream of working independently is a reality for almost 10 million
people in the United States, or roughly 10 percent of the workforce,
according to the Bureau of Labor Statistics. The rewards of self-employment
include independence from supervision, the ability to set your own
hours, and the satisfaction of knowing you are writing your own
ticket. And yes, if you want, you can often work in your bathrobe.
makes it easy to work wherever you go. With an up-front investment
of a few thousand dollars in a computer, bandwidth (telephone, fax,
Internet), and possibly a wireless device, many people who work
with information are in a position to strike out on their own.
despite the freedom and opportunity, self-employed people, like
all businesspeople, still must answer to a customer or a client.
Moreover, self-employed people bear all of the responsibilities
for their success, including doing all the work that can't be billed
to a client or charged to a customer. To get paid, you have to do
management - time management, client collections, and supply purchases.
and accounting - records, invoices, bill payment, and taxes.
- cash management, accounting, financing, and pricing.
- advertising, networking, developing marketing materials, and
- hardware and software purchasing and maintenance.
-trends in the industry, conferences, new skills to keep pace
with the market.
are several ways to work independently, including some that shift
these responsibilities to others. If you work on a temporary basis,
possibly as an employee of an agency, you can avoid some of the
expenses and responsibilities of self-employment yet retain some
of the independence. If you work as an independent contractor, you
will receive a 1099 from the client and may earn slightly more than
if the work came through an agency, because you will find the work
yourself. And if you work as a sole proprietor, your work will be
considered a business service, for which you will
be able to charge fees comparable to those of other professional
services firms. Some self-employed people combine these types of
relationships, which complicates taxes but can help manage financial
fees that make you competitive, yet profitable
When you are self-employed, you are responsible for your own compensation
and benefits. The good news is, you get to decide how much to charge
for your work. The reality is, there is a market rate for professionals
of every kind. Unless you're a household name within your industry,
or outstandingly well qualified and a great salesperson, you will
have to charge somewhere near market for your services.
agency fees. If you work for a temporary agency, you will be
paid a rate set by the agency. There may be some room to negotiate;
for example, you may be able to refuse assignments that pay less
than your desired minimum. Temporary agencies charge their clients
fees that allow them to pay their workers a competitive market rate,
plus a margin for business expenses and profit.
contractor fees. If you work as an independent contractor without
going through an agency, you have some leeway in establishing your
professional fees, but you should charge close to market. To calculate
this rate, start with the prevailing full-time salary for that job.
Then divide by 2080, the number of work hours in a year (2080 =
52 X 40). This is the hourly rate for your job if benefits are being
paid for by the employer.
as a contractor, you need to pay for your own benefits, as well
as additional Social Security contributions, so the number needs
to be higher. Salary.com uses an adjustment factor of 30 percent
to convert an hourly wage for a salaried employee to an hourly wage
for a contract employee. Multiply your unadjusted hourly rate by
(1 + 0.3) to get your adjusted hourly rate. For example, if your
unadjusted hourly rate comes out to $20 per hour, your contract
rate should be $20 * (1.3) = $26.
example shows how this works for a senior-level web designer in
Kansas City. A Web designer III working in Kansas City makes $66,244.
The unadjusted hourly rate for this position is $66,244/2,080, or
$31.85. Adjusted by 30 percent, the contract rate comes to $41.40.
fee for a Web designer III in Kansas City
Salary.com, May 2002.
proprietor. An agency might pay a contract Web designer $45.20
per hour, but charge the client considerably more - well over $100
- to cover business expenses and make a profit. When you're self-employed,
you assume both the responsibilities and the rewards of being an
agency. If an agency charges $125 per hour and you want to do the
same, you should be able to offer your clients a comparable level
of service. You might have to work 50 hours a week to do 20 or 30
hours of work you can bill to a client. Shorter projects tend to
be less profitable than longer ones, because it still takes just
as long to find them. When setting fees as a sole proprietor, research
the prevailing rates in your industry as well as your reasonable
costs of doing business.
as a sole proprietor, you can work on retainer, for a guaranteed
minimum number of hours or days. In exchange for the reduced administrative
responsibilities, you can lower your rate somewhat. The risk of
working on retainer is that you will become too dependent on one
source of income. If you lose the client, it could take a while
to find other revenue. For a sole practitioner, networking for new
customers is critical and it is more effective if you have more
clients to pass on the favorable recommendations for your good work.
Working on retainer can also create problematic tax consequences
if the relationship begins to resemble part-time work or independent
contracting. Ask your accountant for advice about working on retainer.
yourself generous benefits, as any good employer would do
Many self-employed people make the mistake of paying themselves
less than they deserve by underpaying in benefits. One of the goals
of self-employment should be to earn an amount comparable to what
you would earn if you worked for someone else. You could keep all
the fees you earn in cash, but then you wouldn't have some important
protections and benefits.
leave, holidays, and vacation time. Paid time off is a price
of freedom. When you don't work, you don't get paid. You can build
paid time off into your professional fees if the market will allow.
Instead of dividing by 2,080, divide by another amount - 2,000 (two
weeks of paid time off), 1,960 (three weeks), or 1,920 (four weeks),
Medical insurance can be very expensive, especially if you are accustomed
to getting it for little or nothing each month. Employers typically
pay at least two-thirds of the cost of medical insurance. On your
own, you not only must buy your own insurance, but you must also
pay individual rates that are much higher than the group rates most
employers receive. Obtaining insurance for yourself and your family
will be more complicated if you or one of your family members has
a preexisting medical condition.
if you work for yourself, you may still be able to purchase medical
insurance at group rates through a professional association. Or,
if you have an employed spouse who can extend this benefit to you,
you can focus on bringing in cash. Having two medical benefit policies
is expensive and unnecessarily redundant; cash is never redundant.
plans. There are many options: a simple IRA, a Simplified Employee
Pension Plan (SEPP), a simple 401(k), a profit-sharing plan, a Money
Purchase Plan. A common approach for self-employed people is to
use a combination of a profit-sharing and money purchase plans that
allows you to contribute 20 percent of your earnings, up to $30,000,
toward your retirement each year. The combination plan does not
lock you into making the mandatory contributions. This is a useful
feature as business conditions can fluctuate and personal circumstances
and long-term disability insurance. Life insurance is very important
if you have a mortgage and children. These responsibilities need
to be met even in death, so you need to estimate the cost of your
remaining obligations and buy insurance to cover it. For most people,
term insurance is enough. Whole life typically makes sense only
if you have a large estate. Term is cheap and you can purchase considerable
protection for your family. Another advantage to term insurance
is that you can terminate it or scale it down when your house is
paid for and your children grown and on their own. At that point
most of the rationale for having insurance is gone.
term disability insurance is extremely important. If you become
unable to work, regardless of the reason, the combination of your
living expenses and your lack of income can bring extreme financial
hardship to your family. Disability insurance provides replacement
income in the event that you can no longer work. Buy it-it's cheap.
Security and Medicare. These are not benefits, but taxes. When
you work for a company, the employer pays half the Social Security
(FICA and FUTA) deduction; the other half is taken out of your paycheck.
When you become self-employed, you are both employer and employee,
so you pay the full Social Security taxes, double what you pay as
expenses are a cost of doing business
In addition to benefits, you will need to purchase office equipment,
office supplies, computer hardware and software (and upgrades),
and other essential items. You may also need to hire other people
as vendors to do some of the work. These expenses, though tax-deductible,
can add up. In addition to office furniture and supplies, a Web
designer III in Kansas City needs, at minimum, a state-of-the-art
computer, laser printer, scanner, high-speed Internet connection,
telephone, fax machine, and thousands of dollars' worth of software,
all of which must be kept current. The designer probably also needs
a good accountant. These expenses should be factored into a sole
proprietor's professional fees.
associated with a project can be billed directly to the client.
For the Web designer in Kansas City, these include typefaces, photography,
illustration, third-party images, high-resolution scans, presentation
materials, long-distance telephone charges, and other costs associated
with getting the work done.
workers and independent contractors are usually able to work in
the client's office using the client's equipment, administrative
resources, etc. If you work as a temp or a contractor and the client
expects you to provide your own computer or other services, you
should raise your rates accordingly.
may not always come in when you expect it
In addition to deciding how much you should get paid, you also need
to determine when you will get paid. If you wait until the end of
a job to submit an invoice, you may need to wait another 30 days
- or longer, if the client is slow to pay - before you see any money.
This lag between when you get the job and when you get paid can
be difficult to manage, especially if you incur expenses during
the project. When an employee starts a full-time job, it typically
takes two weeks to a month until the first paycheck. But when you
work for yourself, it can take much longer.
way around this cashflow problem is to charge a certain percentage
of your fee up front, a certain percentage when you reach a major
milestone, and the balance when the project is over. You can establish
these terms in your original proposal so that the client is not
surprised later. In addition, self-employed people commonly add
language to their invoices to the effect of "Terms: net 30 days"
to show they expect to be paid promptly. Many clients pay on time,
some within 10 days of the date of the invoice. Find out the typical
arrangements in your field, and discuss payment terms with each
a client will just not pay at all. It may happen once every several
years, usually because the client is having problems with its business.
Although the client is contractually obligated to pay, it may be
unable to pay, or it may refuse for another reason. Sometimes you
can renegotiate with a client to make partial payments over an extended
period. A collection agency or a lawsuit is a last resort: the effort
may or may not be successful, it will cost you more money before
you get paid, and by then the business relationship is likely to
be destroyed. Most business owners understand that they may not
be able to collect 100 percent of their fees, so as long as bad
accounts represent only a small fraction of total revenue, they
are seen as a cost of doing business. Businesses fail, but failed
entrepreneurs usually begin again.
Johanna Schlegel, Editor-in-Chief