Employee to Independent Contractor

For the past 12+ years I have worked for 3 different companies as an employee.

I am now looking for a new position and the best option (in regards to finances) that I have is a company that may hire me as an Independent contractor.

So, what does that mean exactly?

I know that I will have to personally handle getting health insurance, paying my income taxes, any life insurance, vacation, sick time, etc...

What else do I need to consider?
Has anyone else made the transition from employee to independent contractor? What was your experience?

I am worried, but I think it is mainly because I have never been an independent contractor. I have a family and insurance is very important to me along with retirment contributions, etc...

Any info is appreciated.

A blessing and a curse at once!

Make CERTAIN you're being paid appropriately. Getting a 'slightly' higher pay as a contractor doesn't compensate for the expenses adequately. You'll need to study and project forward some.

You should seriously consider an LLC, or some incorporation, along with the cost of some liability insurance. For this you'll want some legal advice (there's lots of material on the web on the subject, but at some point you might need a lawyer for an hour or two to launch things properly).

The corporate identity helps with taxes and expenses. If you're paid personally, the options are closed off somewhat. Paid through your LLC or Inc., you're able to deduct expenses and even divide your income to advantage. For example, it's perfectly fine to pay your kids - and that's a salary apart from your own, an expense to the corporation. It takes an accountant to advise you; the rules are not short and simple, but that's the game and corporations take advantage of the rules every day.

Tax avoidance is your personal responsibility. Tax evasion, of course, is a crime.

Insurance is a huge issue, and you're going to have to research that before all else, IMO. Depending on your income range, it may be the deciding factor for you.

I had to insure my son outside work. To add him to a group policy was going to be $375 per month - same for 1 child or 5 children. I found insurance, the ONLY carrier that would take a child under 5 as an independent policy, for $125 a month.

A year and a half later, he was diagnosed with leukemia. It will cost $300,000 to cure him, but the cure rate is 90% and he's doing very well. He went from bedridden, unable to walk, severe back pain and anemia (weak, lethargic) to a normal, running, energetic kid in 5 months. There's two years left of a 3 year protocol. $2,000 a month in medications, $6,000 spinal tap once every 3 months, any fever over 100 requires hospitalization for 3 days at $15,000 per week.

You just GOT to have insurance if you have anything of value, like a home.


Ok, 'nuff of that......

I've contracted independently for many years. I started with it in '82, landed a big contract and set myself up very nicely, except for paying attention to taxes. Don't make that mistake.

Do the paperwork. I had a rather uncomfortable but cordial relationship with the IRS for several years over that.


Read the contract! Your position in the contract makes all the difference, and think carefully about what you do and how you'll move forward.

Are you simply going to continue employment?
Are you going to make a product at some point?
What non-disclosure and non-competition clauses will the customer (employer) want?
Are you providing work for hire products or are you free to own what you make, licensing product to the customer (so you can sell it to others too).


Think about it this way. If you make some blackbox product that could be useful to 25 large firms, 250 medium firms or thousands of small firms in a slightly different version, why should you be paid once and have no ownership? Is it simply because you're tied to a mortgage and have to avoid taking risks? How old are you? How much energy and drive is in your future?

You can't make 1/50th the income you could make if you could sell you product. Now, the numbers are difficult. You might be paid $50,000 to write something over the course of 6 months, but the client wouldn't pay that for a license on a product of that description, they might fork up $5,000 (just example numbers here).

So, all that hard work and you get only 5G, but if you made if on their time you'd get 50G. Perhaps it's safer, but hey, what's safe these days, really?

It's tough to fire an employee. You can drop a contractor like switching plumbers, especially if you've fashioned the contract that way (from the 'employer's perspective).

So, what if you could package that 5G product and sell it to 50 companies over 2 years? Not 'so' attractive, right?

Repackaged, might it be desirable for 10,000 smaller companies at $500?

Dreaming, right?

Yep, the American dream.

I'm not trying to point you toward product development: I don't need the competition :)

However, this was the line of thinking I managed to fall upon, and you might too.

I worked for a few small firms, one small'ish' firm (75 employees).

I made a product FOR him. I got perhaps $3,000 for the time to make it on a work for hire (he owned the work, I just worked for him).

However, I was the only programmer. This was a one-to-one business relationship, me and the owner. He saw potential, put money into promotion, I put time (kindly under a stipend) in to polish the product, and we sold it to his competitors.

We split enough to fund a retirement plan.

It can end up just 'happening' to you anyway, depending on what industry you're in and how you work, how 'good' you are, especially and meeting commitments and deadlines, not over promising, never under delivering.

With kids and a house, it's scary. Perhaps its a game for the young or the desperate, or the gutsy.

This much is for certain. The money is where the dollar flows, and if you're a hired gun, it's not flowing through your hands. That flow is in business, otherwise you're a plumber, of a kind.

There's nothing wrong with that, not at all. Presumably there's less risk. It's how most of us earn our way.

Once you consider that switch to independent operation, however, you're opening up a larger subject than just the means by which the income is conducted.

First thing you have to think of is -- do you have a sustainable client base for your services? Because if it's yes, it's easy to pay taxes, insurance, salaries, etc.

If your contract is only good for, let's say 2 years, and not sure you can get an extension or a new client, that's the thing you should worry about before trying to figure out what are you going to finance.