jsync | Java Staffing Specialist

Consider Contracting?

06/01/2006

by Dave Fecak

One of the most common conversations we have with Java professionals is on the topic of contracting. It usually starts like this:

Candidate: “Lately I’ve been thinking about becoming a contractor.”
Recruiter: “OK, great! What do you know about contracting?”
Candidate: “Nothing really, that is why I called you!”

As you can imagine, this typically leads to a general overview of contracting, the pros and cons, some of the legal/financial and career implications, etc. We thought this month we would focus the Recruiter’s Corner on answering some of these questions for you in advance, and you can decide for yourself if contracting is right for you.

(FOR THIS EXERCISE, LET’S ASSUME YOU ARE CONTRACTING FOR jsync AT CLIENT XYZ)

There are typically two types of contract employment. One is ‘contract-to-hire’, which essentially means that the end client XYZ has an agreement (often called a ‘buyout’) with jsync that specifies their right to hire you as a full-time salaried employee at some point during the contract. This may also be called ‘try before you buy’, because XYZ is getting to rate your performance before committing to making you a permanent employee. Of course, the contractor (you) are entitled but not required to accept a permanent offer from XYZ if/when an offer is made.

The second type of contracting we will call ‘pure contracting’ for lack of a better term. This means that XYZ probably does not have any intent of hiring you as a salaried employe, and typically your contract with jsync will stipulate that you are not entitled to accept an offer of permanent employment with XYZ without consent from jsync. Sometimes XYZ will give a set duration for the length of the contract, but most often the length is not predetermined. In most cases when a contract length is stipulated and a contractor is providing valuable services, XYZ will extend that length as the end of the contract nears.

Just as there are two types of contracts, there are also two ways of contracting, often referred to as W2 and 1099. A W2 employee will have all of their taxes (state, federal, FICA, unemployment) paid out of their paycheck, so the check a W2 employee receives is what remains after Uncle Sam & Co. take their share. Most of you have probably worked as a W2 in the past at one time or another, so becoming a W2 contractor is not a huge change from a tax perspective.

A 1099 contractor, often called an ‘Independent’, does not have their taxes taken of out their paycheck. If a 1099 is receiving a $50/hr contract rate, he/she can simply multiply that by the hours worked to determine what their paycheck will be.

Pros & Cons of Contracting

There are obviously some pros and cons to entering the contracting world. Here is a short list of the most common things to consider before making the move.

PROS

$$$$$$ – contractors are paid a premium above permanent employees – the amount of that premium varies based on several factors (supply & demand, skill sets, etc.) but you should expect more gross income as a contractor. As an independent you can also claim some expenses. And unlike permanent jobs – work 50 hours, get paid for 50 hours (in most cases)!!

Flexibility – contractors don’t have limitations on time off (unless imposed by clients)

Autonomy – being the boss empowers you to control what projects you accept or reject

Variety – most contractors work on several projects over a period of a few years. Not only can this prevent the burnout of working on one project for eons, it also can increase your skill set. A variety of projects = a variety of technologies = a more well-rounded background

CONS

Paperwork – contractors need to pay attention to tax issues, contractual language, invoices, expenses, and several other details that permanent employees do not

Stability – contractors are often the first to be dismissed if a company has financial issues, and the ability to find new contract opportunities is somewhat dependent on the economy

Benefits/Perks – contractors are most often responsible for acquiring their own medical/disability insurance and are typically not entitled to many of the perks of permanent employment, such as 401k matches, pensions, stock options/stock purchase plans, etc.

Fricitional Unemployment – if your project ends and you have any delay before starting your next project, you are part of ‘Frictional Unemployment’. Contractors must be aware of the possibility that they will not be billable or employed 12 months a year, and they must adjust their budgets and rates accordingly.

W2 vs 1099

If all of this still sounds attractive, you should consider whether you want to work as a W2 or 1099. Being a W2 requires very little change for most people who have worked as permanent W2 employees in the past, but the most common consideration is medical benefits, as most firms will not pay the cost of medical insurance for contractors. You should assess the cost of benefits for your particular family situation and adjust your desired hourly rate to include the additional cost. The pay rate for a W2 is typically a bit less than for a 1099, as their is some burden on the employer to have the W2 on the payroll.

Which brings us to 1099. Many 1099 contractors decide to incorporate, although that is not a requirement. If you do not incorporate, you are considered a ‘sole proprietor’ and your Social Security Number serves as your Taxpayer ID. If you do decide to incorporate, you will get an Employer Identification Number/Tax ID. You should consult with attorneys or accountants to discuss other advantages and disadvantages of incorporating, which should include topics on taxation (What and when are you required to pay?), costs of incorporation, liability and liability insurance, expenses and write-offs, etc.

BOTTOM LINE: Contracting is not for everybody, but everyone in the software business should be aware of the options contracting provides. If you decide you want to discuss contracting, let us know!

Links:

An article somewhat specific to getting into software consulting from Dr. Dobbs.

Tax definitions for sole proprietors, corporations, S-Corps, partnerships, etc from Entrepreneur Magazine.

Internal Revenue Service

Pennsylvania Department of Labor & Industry

Disclaimer: Not only is Dave Fecak not a lawyer, he’s never even played one on TV. Please use this information only as a guideline and always use licensed legal/financial professionals for sound advice.

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