[HN Gopher] Contract to Hire Discount
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Contract to Hire Discount
Author : andrewmcwatters
Score : 31 points
Date : 2022-09-26 18:26 UTC (4 hours ago)
(HTM) web link (blog.andrewmcwatters.org)
(TXT) w3m dump (blog.andrewmcwatters.org)
| andrewmcwatters wrote:
| I think something I should clarify here, and perhaps in the
| article itself, for HN readers is that this is specifically with
| respect to contract to hire, non-private business 1099-NEC or W2.
| The latter of which is already specifically for employees.
|
| If you are a single-member LLC or an agency, your rates are
| business rates.
|
| For example, my agency charges $175/hr per resource.[1]
|
| That is to say, contract to hire employment is not contracting a
| software development firm.
|
| [1]: https://www.andrewmcwatters.com/services
| a-dub wrote:
| what is the difference between contract to hire and business
| services in the time before the contract is up?
| andrewmcwatters wrote:
| It is a widespread practice in tech that employers will give
| employees contract to hire agreements, pay them by W-2 with
| only base pay and no benefits.
|
| When the conversion period ends, base pay is cut, and that
| allocation goes into employee benefits.
|
| You're an employee to the IRS the whole time.
| a-dub wrote:
| ok. for passthrough agency or other W-2 co-employment/peo
| arrangements, what you say makes some sense.
|
| for business to business billing it's basically offensive.
|
| i'll also note that those passthrough agencies, peos and
| co-employers can charge up to a 100% markup though.
|
| ...and, contract to hire is still just contract, until
| hire.
| tptacek wrote:
| I'm spitting into the wind here, because the norms of temp-to-
| hire are simply not the norms of contracting and probably never
| will be, but, broken record: your contracting rate is _wildly_
| higher than your FTE salary. 2x would be a lowball.
| gurchik wrote:
| So if your contracting rate is 2x your FTE salary, and the
| company has offered you to be converted full time at 1x FTE
| salary, should you do it? It is true that the employer will now
| pay for things on your behalf like health insurance, paid time
| off, taxes, etc., but I find it unlikely that all of those
| things add up to the wages you are giving up.
| jtrtoo wrote:
| A 2x hourly rate (on a contract basis) only nets out to ~1x
| FTE over a typical year. (I'm speaking generally of course).
|
| The 2x doesn't come for free nor is it just for PTO & health
| - it's paying for all the non billable time generally spent
| marketing, prospecting, qualifying leads, creating proposals,
| paying for time to proposals that never result in paid work,
| etc.
|
| A typical independent consultant or freelancer only does
| billable work 50% of the time.
|
| To answer your question as to "should you?" - it depends on
| your goals. Contracting versus standard employment is not
| just a financial, but a lifestyle decision.
| tptacek wrote:
| If you want a full-time job, yes? If you can get something
| resembling 2x your current FTE as a full-timer, than your
| contracting rate is ~2x _that_.
|
| If the question is "should I freelance or take a full time
| job", that's a much bigger, more involved question.
| a-dub wrote:
| and a key point regarding the two: contract/freelance rates
| are higher because there's no commitment from the employer
| regarding a stable stream of future work. also they're
| short term, so the actual gross difference is typically
| quite small.
|
| where there's a general expectation that a w-2 earner will
| be budgeted for years into the future.
| tptacek wrote:
| Yep. If you're hustling and pretty good at sales, a
| 60-70% utilization would be a good year. So, right off
| the bat, you can see you need to be making a lot more
| money per billable day than you would with an FTE salary:
| at 50% utilization, you need more than 2x just to be in
| the black (after tax and benefits overhead).
| andrewmcwatters wrote:
| I agree with you. Contracting is an entirely different ballgame
| to me. Temp-to-hire is the subject of this article. The terms
| are conflated, unfortunately.
|
| 2-3x base pay is a rule of thumb I've heard. Generally speaking
| however, most small software development companies are around
| $150/hr+ in practice.
| asperous wrote:
| This article and many of the commenters are talking about "cost
| plus" pricing strategy, is perhaps it is more like a comparative-
| plus-cost strategy.
|
| Consider instead a "value" strategy, specifically you can price
| yourself high and see if you can get engagements. If not, lower
| your price until you can. Or start low and raise until you can't
| get engagements. Either way you are letting the market set your
| rate.
|
| The truth is there is a variety of factors that control your
| pricing power... marketing, supply/demand, availability, quality
| perception, risk, fire-ability, and so on.
| asd33313131 wrote:
| Should also add your half of FICA (7.65%), so should be closer to
| 20% of pay
| fred_is_fred wrote:
| What about time off? a few weeks off should be worth a few
| percent also. Some contractors get this, some do not.
| andrewmcwatters wrote:
| Yes, this depends on the manner in which you are hired. In W-2
| contract to hire positions, an employer would be paying this
| already.
| Gortal278 wrote:
| There is also the contract-to-hire full time compensation
| penalty. I can't prove this with data, but I know from friends,
| former colleagues and old bosses that contractors transitioning
| to full time get lowballed/bottom of band offers most of the
| time. The only way around this is to bring other active offers to
| the table.
| vsareto wrote:
| C2H is generally shit and people should stay away from it, if
| only because a lot of the spammy/body shop recruiting firms
| often use it (and still put you through a tech interview)
| flappyeagle wrote:
| I just did a contract to hire, I charged about 3.5x my base
| salary on an hourly basis, but limited to 20hrs/week. I think you
| you need to get at least 2x for it to make sense.
| ravivooda wrote:
| I just wanted to commend how clear the Privacy Policy for the
| website is: https://blog.andrewmcwatters.org/index.php/privacy-
| policy/
|
| It's just clear!
| andrewmcwatters wrote:
| Thank you! The Privacy Policy is the stock language from
| Wordpress 6.0.2. So hats off to Automattic for sensible
| recommended text.
| SarfasCodes wrote:
| Take your expected salary per annum, pre deductions. Divide that
| by 200. This is your BASE line break even contracting rate per
| day. Any thing less, and you're going to have issues financially.
|
| @ $50,000 per annum
|
| 50,000 / 200 => 250 per day.
|
| On average, you'd realistically want to be charging closer to
| Base + 40%. Im my example, this would be $350
|
| just to give yourself time off, $$ for equipment, marketing,
| growth, insurance, accounting, other general business costs.
|
| Contractors are expensive because we're the business. We take on
| the risk. We do the HR, taxes, insurance, office rentals,
| equipment costs/hire. Everything.
| makestuff wrote:
| So Senior engineers on contract at a big tech company could
| command ~3,000 USD per day? Or does this math break down when
| you get into salaries in the 400+k range?
| jahewson wrote:
| I know solutions architects who are billed out to companies
| at that rate. They only take home half of it though.
| superb-owl wrote:
| Agreed. I usually tell people to charge close to 2x their
| salaried rate. You can negotiate if you're hungry for business,
| but I've found the price tag is usually not the biggest blocker
| to getting clients.
| rsweeney21 wrote:
| Here's a handy spreadsheet to calculate your hourly contracting
| rate:
|
| https://docs.google.com/spreadsheets/d/1hVtKa9Vls7Uy7YHPA-RF...
|
| It factors in PTO, FICA, 401K match, equipment, etc. It's made by
| my company, https://www.facet.net
| UncleOxidant wrote:
| Don't forget that when you're hourly you're usually limited to 40
| hrs/week because they don't want to pay time and a half. After
| you go permanent salaried there will be no such limitation and
| oftimes you'll be expected to go over 40 hrs/week.
|
| I'm currently contracting in a startup where it seems that most
| all of the permanent employees work weekends. I was recently
| asked if I'd be interested in going permanent and my reply was
| "not just yet" because I really don't want to work weekends.
| adamsmith143 wrote:
| Contractors in Tech are generally not given time and a half in
| my experience. You don't qualify.
| mathattack wrote:
| Usually as a contractor you should charge a lot more than the 3%
| plus $8/hr. You don't bill 2080 hours per year, and have to pay
| for many other incidentals. I think a 50% premium is more
| appropriate.
| a-dub wrote:
| this is correct. direct contractors without agencies typically
| pull 1.5x-2x annualized base salary in hourly rate form. this
| is because contractors are estimated to spend 40% of their
| working hours in a non-billable state (like waiting on contract
| negotiation delays, for example).
|
| additional overheads like accountancy professional services,
| insurance brokers, insurance and equipment as well as the time
| spent dealing with them are significant.
|
| if a contractor converts to fte, or a long term contract (12+
| months) then these figures adjust down. but for short term
| contracts, the per hour rates can appear quite high (although
| actual gross totals tend to not be much in the scheme of
| things).
|
| this is why the mean rate from the last hn contractor salary
| poll was $100-$150/hr.
| andrewmcwatters wrote:
| Correct. This article is regarding W-2 contract to hire (or
| temp to hire) agreements, and not consultancies.
| bena wrote:
| This is for Contract-to-Hire though. Which is a little
| different.
|
| You aren't going to be billing this company anyway. You are
| essentially setting a fixed rate for a fixed amount of time
| with the expectation of full-time employment after that time.
|
| So it does make sense to essentially contract yourself at that
| rate. But he's saying when you do, add in the 3% plus $8/hr to
| cover the things not being covered by your employer during that
| time. It'll make the transition a little smoother. You won't
| feel as if you're shafting yourself.
|
| I'd also add that if I were Contract-to-Hire, I'd also
| stipulate that once I'm hired, I'm a full employee. My contract
| period is my probationary period and after I should be treated
| as a full employee with all the benefits that entitles me to:
| health care, 401k matching, etc.
| andrewmcwatters wrote:
| Correct. The funny thing is W-2 contract to hire agreements
| are employee agreements the whole time.
|
| 1099-NEC would be the appropriate way to report non-employee
| compensation but many businesses do not do this.
| ilc wrote:
| C2H discounts and distorts more than your pay.
|
| As an employee, you are taking on a 6 month contract can be
| terminated at any time, basically. And you are stuck performing
| "for your job".
|
| From what I've seen with C2H employees, they are either what you
| see, and you like it, Or it changes, when they become employees.
| The latter is a real problem. Because the whole point of C2H is
| "try before you buy." But, really that try isn't under realistic
| conditions. If they are what the company likes, buying out the
| "C" can be a pain, and cause instability and unhappiness for the
| employee.
|
| C2H employers, use it for various reasons, but I've seen mainly
| instability in some form, cause them to use C2H. Be it that they
| can't hire perm because of internal malfunctions, or they aren't
| sure if they'll be around for you to go perm, etc. In one case I
| think they did it to make sure the contracting agency found
| people for them, because the profit is higher.
|
| As far as rates: I'd bill it as a 3-6 month contract, that I
| assume would not renew. Remember, you can decide to walk away
| also, and see the above... you just might.
|
| If you do C2H:
|
| It's strange out there, stay interviewing my friends.
| andrewmcwatters wrote:
| Interestingly enough, most employees can also be terminated at
| any time. At least in the US, as far as I know.
|
| To my knowledge there is no special legal protection for full
| time (or "direct hire") employees versus contract to hire
| employees. They are both just W-2 employees.
| RileyJames wrote:
| I've been thinking about C2H to resolve the "performance
| reasons" issue. In NZ the situation is reversed. Even during
| probation, performance issues require managing, not firing.
|
| In this environment it would be preferable to hire on
| contract as a 'probation period' in order to determine fit.
| ilc wrote:
| Usually there's some excuses needed for perm employees from
| all I've seen.
|
| Certainly more painful than ending a contract for a large
| company.
| throw827474737 wrote:
| Even in ""well-protected"" Germany you usually have the 6
| month probation period in the contract that makes termination
| easy?
| cj wrote:
| (Genuinely curious) How does that work? If you want to fire
| someone for performance problems, how do you do it?
|
| In the US no explanation is required. Anyone can be
| terminated at any time with no justification (unless you
| negotiated special employment terms, which is rare outside
| C-Suite or VP level)
| littlecranky67 wrote:
| Within the probation period, you dont need a reason, its
| fire-at-will. After those 6 months, it will be almost
| impossible to fire anyone for "performance reasons" (or
| any other reason). Have you ever heard of a large german
| Software company that makes _quality_ software? There is
| your reason :)
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