I'll give my experience in case it helps, but I'd start out by giving some advice. If the reason you want to move from a permanent salaried position to contract work is to make more money, don't.
If you don't want to read my advice and just want my experience skip to the next section.
There's a reason contractors make more money; it's because it's a lot more work. The way I think of salaried employment is that it's an exchange. The salaried employee agrees to work for less than the market rate, and in exchange the employer agrees to subsidize your down time. In other words, you don't have to worry about constantly finding the next thing to do just to get paid. You get to focus on the work.
You'd be amazed how much work is involved contracting. You must go to networking events and startup meetups constantly for years in order to build up your identity. You must actually create your own portfolio website and keep it updated. You must keep your LinkedIn and Twitter profiles updated. You must do your taxes and send out W9s to each of your clients every year and follow up with them if they don't respond (and then talk with them more when they send you forms that don't match your records). You must meet with a lot of people and talk about their projects before figuring out that only 50% of them are even relevant to what you do, and of those maybe 50% actually get to the quote/estimate stage, and of those maybe 50% become paying contracts.
I'd say, when I was just contracting to support myself, maybe 50% of my time was billable; closer to 75% when I actually had a big contract that could keep me busy for a few months without worrying about lining something else up right away. So, if my billable rate was $100/hr, my effective rate was closer to $50-$75/hr. And then here in the US, taxes would take about 30%, so closer to $35-$45/hr.
On top of all that, you can never count on the work you have. You may have a need for X hours per week to sustain yourself, but that doesn't mean your clients will require X hours. They only need what they need. And being a contractor, what you need is officially not their problem. Of course, you could always work out deals with clients that guarantee X hours per week, but they'll only agree to it if they think they actually need more than that, and as soon as they stop needing it, they'll end the contract.
You could be living the high life with one awesome client, your bread and butter, for months or even years, and then suddenly wake up to an email saying they no longer need your services. Maybe the project they had you do is finished. Or they decided they were spending enough with you to justify a full-time employee to do it in-house. Or maybe the CEO of the company just found out his nephew does programming, and he can do it instead of you. Maybe their decision to cut you is a good decision for them. Or maybe it's a really bad decision that you can't prevent them from making. Doesn't matter. All that matters is that, as of this morning, you now have no paying work.
I could go on and on, as these are only the most pertinent warnings that come to mind. Hopefully I've sufficiently scared you. Cool. Now here's how I did it...
First of all, I started contracting way before I needed to, just because it was fun, and it served as a way for me to get paid to learn how to do what I enjoyed and to become better. For years, I'd get up at 5 or 6am, go to work, come home around 5 or 6pm, make dinner, and work on my own projects until 2 or 3am. Having built your own projects is by far the best way to convince the first few clients to actually pay you (once you've done enough networking to meet them). I'd estimate I spent probably a couple thousand hours building my own projects, or building things in-kind for friends and family before getting someone to pay me straight up cash. I did this from the time I was a freshman in college to the time I was a senior (full-time student + job + side projects) before getting a paid contract I think, and then continued to do it for another year or so after college.
You may not have this problem if you're already salaried doing the same kind of work that you want to do contracting. I, however, was a mechanical and electrical engineer who wanted to build software. WIthout a relevant degree or official work experience, I had to teach myself and build stuff. After a few years building my own stuff, I also started doing a lot of open source work.
Eventually though, I had to start charging. This was hard. I started out, as anyone, low-balling some projects. Hopefully you only do that once or twice before you realize how unsustainable it is. Once I realized this, I started asking for more. I remember how guilty I felt at first, as I couldn't imagine that some site I could build would be work over $1,000 (!!!). It's actually funny to look back on it now, and realize how unsustainable even that was. I'm glad I listened to the advice or others at the time and didn't insist on such rates for long.
Like I said before, I continued to contract on the side, also spending tons of time grooming my own portfolio website, building side projects, working on open-source projects, and going to networking events (sometimes calling in my paid personal time to go to really good ones during the week), for several years.
I never considered quitting my job though until I knew I had enough work lined up to make the same amount I was currently making at my full-time engineering job. With student loans and whatnot, this wasn't really even an choice I could make. At times, it felt as though this would never happen. I couldn't conceive of a world where enough contract work existed that I could possibly line up. But I continued (I think this is where a love for what you do plays a strong role).
Eventually, through networking, I met someone who owned a web development company, and I discovered the world of sub-contracting. They had a lot of work and not enough people to do it. They wanted to hire me, but I knew I wanted to contract on my own. So we worked out a deal with me sub-contracting, and they could guarantee my at least 30 hours per week for the next 3 months. At our agreed upon rate, that was enough to beat what I was making as an engineer. I figured worst case was that I now had 3 months to find more work, and I put in my 2 week's notice. That was the scariest thing I had ever done (and in fact I wrote an article about it that became one of my first popular posts on HN at the time: http://www.alfajango.com/blog/if-youre-nervous-about-quittin...).
Once I was contracting full-time and setting my own schedule, I was able to kick my networking into high gear. Meanwhile, my new friend's company kept me on as a subcontractor beyond those few months. They actually ended up getting a big client that insisted after a couple months that I was the only one who could lead development of their project. Due to networking and word of mouth, I ended up getting a few clients of my own, one of which was big enough to sub-contract several developers myself. Thankfully by that time, I actually knew some developers who'd do it, developers whom I had met networking and working on open-source).
And the ball has been rolling ever since. I now own a company that builds startups full-time. We are a sort of CTO + dev team for hire; or a software-consultancy-meets-VC if you want to think about it that way.
It's much more awesome than my engineering job. So, I'm not saying don't set off on your own. Just that it's a lot of work, and that none of it is guaranteed to ever pay off. Right now, I'd say my team and I live comfortably, but it's still a lot of stress day-to-day. If I had taken all that time and effort that I spent to be able to contract on my own, and instead channeled it into getting a better job, I'd probably have a lot more money than I do now. But it wouldn't be what I wanted to be doing. That's the real reason to start contracting, for personal growth.
In other words, it takes a lot of work to build a lifestyle as a contractor. If you took all that effort and time, side projects and personal branding, and channeled it instead as leverage to find a better job, that'd probably be a much quicker path to making more money than contracting. So, I wouldn't contract for the money, I'd do it because it's what you feel like you must do to be happy.
EDIT: I should also note that, reading through some of the other comments that say "it's as simple as getting a client, going to meetups, etc." I was tempted to say that at first too. I sometimes forget how much time I spent going to meetups and building experience before any of this really started becoming "simple" for me. It's easy to look back on the past 9 years I've been doing this and forget how much work went into each actual year, or how long a year really is.
What you need to do is go to the Edit screen for this post, hit Ctrl-A, Ctrl-C and Ctrl-V into your blog editor, with some SEO-friendly headline like, "From salaried jobs to contracting: benefits and tradeoffs"
I've never done freelance (at least, not as a complete replacement for a full-time job) but the logistics and hidden "Misc." work-hours of what you have to do besides the actual contract work falls into that dangerous "unknown unknowns" category of things that people like me fail to consider, so your lengthy post is extremely helpful.
Exactly. Freelancing has a lot more control, but less money, and you bid on jobs like an agency would.
Contracting is basically a full time job, but you own the company, can claim expenses / equipment / etc, and otherwise, it works like a normal paid job. You dont, EVER, bid on jobs, you get hired for a set period. Companies like this as it's an _operational_ expense not a HR expense, and chances are, they have a hiring freeze :)
When you're starting out from a salaried full time job and asking HN how you do contracting, they're the same thing.
If you already have clients lined up where you can do work as or within a company without first freelancing, then you're probably not in HN asking how to do it.
No, they're not. You can get a contract role by talking to a recruiter or going on a recruitment website, without any kind of online portfolio or presence. For the freelancing stuff, you need to go through the dance you laid out.
I suppose that's another way to do it. But I can only speak to my experience, and I admittedly don't have much experience with recruiters. I've never used recruiters for either freelancing or contracting and I have a freelanced in several years.
Edit: also, many of the other comments here were, get a client, not speak to a recruiter, so this was somewhat a response to that add well.
I think they also missed the background discussion.
In the UK, permanent salaries are very low compared to other english speaking markets. Several people (self included) mentioned contracting. This is distinct from freelancing in that it usually for a company running a project but in need of some specific skills for a fixed time at a daily rate, rather than asking you to make something for a fixed price.
I see them as distinct career paths, and I'm pretty sure the question was aimed at this.
I'm curious: How do you think these terms are defined, and how do you think they differ? I have never before seen anyone object to usage in the way you did there; in this context, surely almost any (reasonably sane) freelancer will also be a contractor, and almost anyone who is contracting with a client will be doing it on a freelance basis?
In London (which is the context of this) they mean very different things. A freelancer tries to build a brand, and complete projects. A contractor generally doesn't, and is just a temporary employee without benefits, who's being paid a substantial premium for being a temporary employee without benefits.
Don't tell HMRC you said that, or the PCG. If any contractual engagement were necessarily disguised employment the way you just explained it, the former would be bringing in a small fortune in extra tax revenues while the latter would wheel out the lawyers.
I'm getting the feeling that rather like employees who've never considered going independent, there are quite a few people posting here who work as contractors in the sense you're describing (which I'm not saying is incorrect, just incomplete) and don't realise that there is a wider world where maybe other contractors don't work the same way.
What's your avg hours asleep per day in the past month? 1-4 sustained (let's call it 3.7 avg) over years is like no anecdote I've read and believed (though certainly medically possible).
Have you measured your performance at various levels of sleep? Supposedly feeling "rested" isn't even sufficient to guarantee full performance.
Here's one other thing to keep in mind: as with employees, contractors and freelancers are, fundamentally, being compensated for their time. If you don't provide your time, you don't get paid. And you won't get paid more than once for a given hour, week, or job. And there is an upper bound on what someone will pay you for an hour of your time, no matter how "good" you are at what you do.
If you are looking for the sort of security that doesn't depend on an employer or a client paying you for your time, you need to create something that will generate income for you even while you are not working on it. At night. On the weekends. While you are working on something else. This could simply be a portfolio of investments. It could be a software product that you can license or sell over and over for a low marginal cost. But you won't ever get to this by just selling your time to someone else.
Here's one other thing to keep in mind: as with employees, contractors and freelancers are, fundamentally, being compensated for their time. If you don't provide your time, you don't get paid. And you won't get paid more than once for a given hour, week, or job. And there is an upper bound on what someone will pay you for an hour of your time, no matter how "good" you are at what you do.
That applies if, and only if, your contract is set up on something like a time and materials basis. For fixed price contracts, which become an option when you're working freelance, you are very much not being paid for your time, but rather for the results you generate. How fast you generate those results and earn your pay is down to you, and therefore how many clients you can take on and where any upper bound on your earnings fall is also down to you. There may in practice be an upper limit to what you can get paid for your time doing bespoke contract work, but if there is, it is demonstrably multiple orders of magnitude greater than what you could earn as a software developer on salary.
No offense, but you seem to be answering the question as an American worker, not a UK worker. Contracting is VERY different in both countries. If the OP is asking about contracting in the UK, I don't believe your lengthy post has any relevance to him. Almost nothing you say about networking, meetups, paperwork+tax, linkedin, etc. applies to the contracting market in the UK.
> If the reason you want to move from a permanent salaried position to contract work is to make more money, don't.
This may be correct in some cases, but it's not universally true.
1. Yes, there are a lot of things contractors must do that salaried employees don't, but activities like developing and maintaining a portfolio and invoicing don't have to be a drag if you set up efficient systems and processes.
2. Pricing strategy is really important. If you're seeking an hourly rate of, say, $120 but only 50% of your time is billable, you might want to consider the possibility that you'd net more by reducing your hourly rate. In a lot of cases, contractors who struggle with billable hours don't realize that trying to maximize the rate they can get one or two clients to pay will often minimize billable hours. With the right rate, you can attract more clients more easily, allowing you to diversify if you so choose. You will also find that clients want to send you more work instead of getting you in and out as quickly as possible.
3. You don't need to have an "identity" to get business. Unless you're trying to be the top gun for hire who bills $200/hour with no resistance or limit your work to the most interesting or cutting edge projects, there are plenty of opportunities out there that don't require you to be "known." If you have a solid portfolio of work, are responsive and can communicate well, you can acquire clients without a Coca-Cola like branding process.
4. The reason self-employment is criticized from a tax perspective is that most people don't do three things: educate themselves, keep good records and hire a good accountant. As a self-employed contractor, your legitimate business expenses, including home office use, are deductible. Additionally, half of the amount you pay for self-employment tax is deductible as well. Throw in the ability to set up a solo 401(k) where you can contribute up to $17,500 of your earnings as an elective deferral plus 20% to 25% of the profit of your business as a employer profit sharing contribution, and being a contractor can actually be better for contractors at a certain point.
5. If you're constantly surprised by clients cutting your hours or ending the relationship without warning, you're not managing your client relationships well. Period.
> The salaried employee agrees to work for less than the market rate, and in exchange the employer agrees to subsidize your down time. In other words, you don't have to worry about constantly finding the next thing to do just to get paid. You get to focus on the work.
There are no guarantees when you're a contractor, and it isn't for everybody, but let's not pretend that salaried employment is a risk-free proposition either.
At the end of the day, no employer is going subsidize down time in perpetuity. If there's nothing for you to do, or the value that you're creating doesn't exceed what you're being paid by a wide enough margin, there's no reason you should assume that your job is safe. If anything, this is the great lesson you learn from being a contractor: time is money. If you want to be paid for your time, and paid fairly, your time eventually has to be seen as having the capacity to create monetary value for the person or company you're serving.
If you don't want to read my advice and just want my experience skip to the next section.
There's a reason contractors make more money; it's because it's a lot more work. The way I think of salaried employment is that it's an exchange. The salaried employee agrees to work for less than the market rate, and in exchange the employer agrees to subsidize your down time. In other words, you don't have to worry about constantly finding the next thing to do just to get paid. You get to focus on the work.
You'd be amazed how much work is involved contracting. You must go to networking events and startup meetups constantly for years in order to build up your identity. You must actually create your own portfolio website and keep it updated. You must keep your LinkedIn and Twitter profiles updated. You must do your taxes and send out W9s to each of your clients every year and follow up with them if they don't respond (and then talk with them more when they send you forms that don't match your records). You must meet with a lot of people and talk about their projects before figuring out that only 50% of them are even relevant to what you do, and of those maybe 50% actually get to the quote/estimate stage, and of those maybe 50% become paying contracts.
I'd say, when I was just contracting to support myself, maybe 50% of my time was billable; closer to 75% when I actually had a big contract that could keep me busy for a few months without worrying about lining something else up right away. So, if my billable rate was $100/hr, my effective rate was closer to $50-$75/hr. And then here in the US, taxes would take about 30%, so closer to $35-$45/hr.
On top of all that, you can never count on the work you have. You may have a need for X hours per week to sustain yourself, but that doesn't mean your clients will require X hours. They only need what they need. And being a contractor, what you need is officially not their problem. Of course, you could always work out deals with clients that guarantee X hours per week, but they'll only agree to it if they think they actually need more than that, and as soon as they stop needing it, they'll end the contract.
You could be living the high life with one awesome client, your bread and butter, for months or even years, and then suddenly wake up to an email saying they no longer need your services. Maybe the project they had you do is finished. Or they decided they were spending enough with you to justify a full-time employee to do it in-house. Or maybe the CEO of the company just found out his nephew does programming, and he can do it instead of you. Maybe their decision to cut you is a good decision for them. Or maybe it's a really bad decision that you can't prevent them from making. Doesn't matter. All that matters is that, as of this morning, you now have no paying work.
I could go on and on, as these are only the most pertinent warnings that come to mind. Hopefully I've sufficiently scared you. Cool. Now here's how I did it...
--------------------------------------------------------------------------------------------------------------------------
First of all, I started contracting way before I needed to, just because it was fun, and it served as a way for me to get paid to learn how to do what I enjoyed and to become better. For years, I'd get up at 5 or 6am, go to work, come home around 5 or 6pm, make dinner, and work on my own projects until 2 or 3am. Having built your own projects is by far the best way to convince the first few clients to actually pay you (once you've done enough networking to meet them). I'd estimate I spent probably a couple thousand hours building my own projects, or building things in-kind for friends and family before getting someone to pay me straight up cash. I did this from the time I was a freshman in college to the time I was a senior (full-time student + job + side projects) before getting a paid contract I think, and then continued to do it for another year or so after college.
You may not have this problem if you're already salaried doing the same kind of work that you want to do contracting. I, however, was a mechanical and electrical engineer who wanted to build software. WIthout a relevant degree or official work experience, I had to teach myself and build stuff. After a few years building my own stuff, I also started doing a lot of open source work.
Eventually though, I had to start charging. This was hard. I started out, as anyone, low-balling some projects. Hopefully you only do that once or twice before you realize how unsustainable it is. Once I realized this, I started asking for more. I remember how guilty I felt at first, as I couldn't imagine that some site I could build would be work over $1,000 (!!!). It's actually funny to look back on it now, and realize how unsustainable even that was. I'm glad I listened to the advice or others at the time and didn't insist on such rates for long.
Like I said before, I continued to contract on the side, also spending tons of time grooming my own portfolio website, building side projects, working on open-source projects, and going to networking events (sometimes calling in my paid personal time to go to really good ones during the week), for several years.
I never considered quitting my job though until I knew I had enough work lined up to make the same amount I was currently making at my full-time engineering job. With student loans and whatnot, this wasn't really even an choice I could make. At times, it felt as though this would never happen. I couldn't conceive of a world where enough contract work existed that I could possibly line up. But I continued (I think this is where a love for what you do plays a strong role).
Eventually, through networking, I met someone who owned a web development company, and I discovered the world of sub-contracting. They had a lot of work and not enough people to do it. They wanted to hire me, but I knew I wanted to contract on my own. So we worked out a deal with me sub-contracting, and they could guarantee my at least 30 hours per week for the next 3 months. At our agreed upon rate, that was enough to beat what I was making as an engineer. I figured worst case was that I now had 3 months to find more work, and I put in my 2 week's notice. That was the scariest thing I had ever done (and in fact I wrote an article about it that became one of my first popular posts on HN at the time: http://www.alfajango.com/blog/if-youre-nervous-about-quittin...).
Once I was contracting full-time and setting my own schedule, I was able to kick my networking into high gear. Meanwhile, my new friend's company kept me on as a subcontractor beyond those few months. They actually ended up getting a big client that insisted after a couple months that I was the only one who could lead development of their project. Due to networking and word of mouth, I ended up getting a few clients of my own, one of which was big enough to sub-contract several developers myself. Thankfully by that time, I actually knew some developers who'd do it, developers whom I had met networking and working on open-source).
And the ball has been rolling ever since. I now own a company that builds startups full-time. We are a sort of CTO + dev team for hire; or a software-consultancy-meets-VC if you want to think about it that way.
It's much more awesome than my engineering job. So, I'm not saying don't set off on your own. Just that it's a lot of work, and that none of it is guaranteed to ever pay off. Right now, I'd say my team and I live comfortably, but it's still a lot of stress day-to-day. If I had taken all that time and effort that I spent to be able to contract on my own, and instead channeled it into getting a better job, I'd probably have a lot more money than I do now. But it wouldn't be what I wanted to be doing. That's the real reason to start contracting, for personal growth.
In other words, it takes a lot of work to build a lifestyle as a contractor. If you took all that effort and time, side projects and personal branding, and channeled it instead as leverage to find a better job, that'd probably be a much quicker path to making more money than contracting. So, I wouldn't contract for the money, I'd do it because it's what you feel like you must do to be happy.
EDIT: I should also note that, reading through some of the other comments that say "it's as simple as getting a client, going to meetups, etc." I was tempted to say that at first too. I sometimes forget how much time I spent going to meetups and building experience before any of this really started becoming "simple" for me. It's easy to look back on the past 9 years I've been doing this and forget how much work went into each actual year, or how long a year really is.