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Consultant vs. Contractor what’s the difference?

26 Oct

Ever wonder why a Consultant charges double what a Contractor does and doesn’t even hint at looking guilty for it?

A friend of mine asked me why I had different rates for one and why they were so … out of whack.  Here’s a tid bit most people do not know.  If you have a family and you’re a “Consultant” you actually have to double your rate if you want to make the same as a Contractor, and it’s – believe it or not – almost 2 1/2 times to get the same benefits as a Full Time Employee. 

The short answer is a Consultant has to pay for everything themselves.  This includes a 19% (or higher) Federal Income Tax, a 6.5% Social Security Tax, and another 1.54% tax for Medicare.  If you live in some states (like I do) there’s actually a tax you have to pay for doing business as a consultant (.0754 on every dollar), and other local taxes and business fees (add another 1.5%).  So … right off the bat – your costs are waaay hirer than a contractor. 

The next cost you’re hit with is health care (you can verify these numbers on the links provided if you’d like).  For a married man, with 2 kids you can expect to pay anywhere from $975 to $265 a month for insurance … depending on if you actually want to be covered or just like paying $275 a month for a policy that you probably can’t use. (www.ehealthinsurance.com)  This by the way … does not include dental – or vision coverage under any of the plans (nope – not even the $975 a month plan).   So there’s another huge of your check there.

Most consultants have to provide their own phones, and equipment too.  And there’s no “auto upgrade every 3 years” as when you’re working for a corporation.  So you need to set aside at budget to replace your stuff every year or so.  You should – if you’re smart, put aside 10% of every check to cover equipment, phones, and misc. expenses like unexpected travel. 

All of these – you get when you work for someone, and they add up quickly.  A consultant who’s expected to travel needs to be able to travel on short notice, so you have to have that ability.  The job won’t wait for a re-imbursement check.  Which, btw, you’ll probably want to have a lawyer look over your contracts if they’re long term.  A lot of times you will find that a Consultant signs away rights to a lot of things and locks himself into very expensive situations because they’re not a lawyer.  (Case in point – know of one guy who signed a consulting agreement that said he’d be paid $40 a day for travel… fine when he was in the Bay area.  Then they stated sending him to London twice a month…. and yes… they expected him to pay the air fare and room in England.)  

So … read the fine print or get someone to do it for you – you no longer have a legal team or group travel planner to help you.  And in order to keep track of all this with the IRS – you need to (if you have half a brain) hire an accountant… so 10% from every check… goes to all of that goodness.

So – here’s some fun math… a Consultant who expects to make $100,000 a year vs. a Contractor who makes $100,000 a year.  Below is a an actual table of how I’d have to calculate my rate – and this is a very basic table.  It doesn’t include quite a few expenses you’d usually have to do business.

Salary $100,000
   
Taxes  
FICA Match $19,990
Social Security $6,540
Medicare $1,540
WA Business $308
   
Hard Expenses  
Cable/Internet $1,800
   
Insurance  
Business Insurance $600
Health Insurance $7,200
   
Misc. Work Expenses  
Certifications, Legal, Etc. $3,000
Books / Educational $1,200
Computer Equipment $2,500
Office Equipment $500
   
   
Total $145,178
   
Recommended Rate
($145,178/1440 Billable Hours)
$101

This of course brings up a couple more points for the lowly consultant to consider… “Billable Hours”.

Consultants start out with about 2080 hours in the year they can bill.  From that you subtract Holidays (which though they can work, most of their clients don’t – so no billing there.).  Next subtract any Sick Days you’re going to have.  What you don’t think Consultants don’t get sick?  Try flying on a plane packed with 150 potential flu carriers twice a week and NOT get sick. 

It’ll happen – trust me, and no client wants you infecting their staff and bringing down an entire team’s worth of work for 3 days.  Sick means you don’t work – it has nothing to do with “you could work” – it has to do with the client doesn’t want you there.   

Next – are what I like to call “soft hours”.  This is where you, have to do what every business does – determine how much time is lost to locating new clients, going to training, conferences, and the like – which are where you find the lions share of your work often. Better plan for that. 

Finally – you need to consider how long it will be between assignments – and if you’re first starting out that might be a while.  Every business has this as a cost.  As a Consultant you’re no different than anyone else – you have to figure this as an expense of doing business.  You can’t bill a client for soft time – but it’s still an expense to you.  So you need to calculate that into your rate.

Here’s a rough idea of what “Billable Hours” for a year would look like for you:

Billable Hours 2080
Holidays 80
Sick Time 40
Conferences 40
Available Hours to Bill 1920
Downtime % 25%
Downtime Loss 480
Total Billable Hours 1440

Now if I was still young and single and wasn’t picky about health care, and I didn’t need a house with enough room for 3 more people … well you get the idea, I could eat many of these costs – work more hours, etc., and so on.  Single people have a real advantage in being able to be consultants.  Which is why you see that more than married people.

But enough soap boxing… you asked for what the difference in rate fees was between a Consultant and a Contractor?  That’s it pretty much.  It’s a question of working for yourself vs. working for someone else.

By and large – I prefer to work for someone else.  Consulting pays well – and as you can see, if you want to be very successful at it you have to charge a pretty penny.  Most businesses will pay that pretty penny because they have no attachment to you, to the job you’re doing.  Once it’s completed – it’s done you go away and they would have had to pay those costs anyway if they’d hired someone.  But if they hired someone for it – they’d have had to go through the headache of finding you more work. 

If they hire a contracting firm – well the firm essentially has to pay all of those expenses and most businesses assume they do.  What the reality is – is that most Contracting firms offer pretty much useless health care and other benefits.  Often times you have to work 6 months just to get sick days or holiday pay.  (In fact my last contract I was hired in late October, and so had to deal with 3 weeks of vacations for which everyone else got paid … and I didn’t right during the Xmas season.)

In essence – as a Contractor your life pretty much sucks.  But there is the fact that most companies only hire a Consultant if they absolutely need that specific skill or expertise, so it’s hard to get a consistent Consulting gig.  So – Contracting is more popular with companies and provides more work.  Consulting provides better income and benefits – but less work.  Full Time Employees of course – have the benefits of both – but that’s even harder in many cases to find work of equivalent pay. 

That’s my take on it… hope that helps explain a few things.

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Posted by on October 26, 2008 in Work

 

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