Many colleagues in the interactive space have recently asked me about the ins-and-outs of moving from employee status to contract or freelance work, both of which I’ve done for many years. There are nuances to consider in making this move that are worth sharing.
These include your new employment status options, tax implications, and healthcare/benefits. I will cover each in different posts, so as to not overwhelm.
The first thing to consider when moving away from FTE (full-time employee) status is your other employment status options. Contract, contract-to-hire, and freelance work are very different – more so in the current economic environment. Here we go:
1. Contract work: This implies a contract to work full-time on-site at a company (less often an interactive agency), with a placement firm being your “employer,” for a set period of time. In this situation you get a set hourly rate, with the placement firm getting a set amount (typically 10% - 20% of your rate) hourly on top of that.
Up-Side: Contract placement is a terrific “in” to a company. It can be a great resume-builder, and will no doubt expose you to new systems, work patterns, technologies, and most importantly: people. Also, pay rates will likely be higher than your current salary. (Don’t get too excited.)
Contract work also affords the opportunity to really focus on the project at hand, without getting too involved in company politics, while still being given an opportunity to let your expertise shine. It also offers work-life balance, as weekly hours are typically locked-in (and any overtime hours paid at your hourly rate.)
Additionally, even in the current economic environment, it is extremely rare for a contract to be ended prior to the set date. I’ve never heard of that happening. If you are looking to be exposed to new projects, environments and people regularly, contract work is a great option.
Down-Side: In the past, it was almost guaranteed that if a resource performed well, the contract would be extended (or a position offered, and if declined, the contract extended anyway.) Also, contracts used to be 6-12 months; these days, they are more likely to be 3-6 months, if that. And extension can not be assumed.
Be ready to look for a new gig one month before your contract is set to end (which may be soon after you start). And, don’t count on your placement firm to be your advocate with the company they place you with. Some placement firms are great about this, some aren’t. Build a strong communication line with your on-site manager to determine whether you may be extended or hired – but balance this with “pestering.” Excellent work output and a meaningful dialog mid-contract is your best bet.
Ah, benefits. You are not likely to get healthcare, disability, life insurance or vacation coverage while working through a placement firm even in a W2 scenario (I will cover this in more detail in another post.) However, your hourly rate may offset this, and it’s not as scary as it sounds.
Show Me the Money: Payment for contract work can come in two forms: W2 and 1099. W2 means that the placement firm takes out your taxes and covers the employer side of your FICA dues. 1099 means that you get paid the full amount of your hourly rate, and that you need to consider the tax implications. (I’ll cover this in an upcoming post as well.)
Typically, a placement firm will offer both W2 and 1099 options. It’s common to get $5-$10 more an hour for 1099, as the placement firm does not need to cover your FICA dues and there is less administrivia for them. However, you need to do the math and figure out whether you “really” make more working 1099. Having a firm take out your taxes for you and cover the employer-side of your FICA can really add up on the positive side.
2. Contract-to-hire: Again, this implies a contract to work on-site at a company with a placement firm being your “employer,” for a set period of time. The same up-sides, down-sides, and payment options apply as standard contract work, with one significant difference:
The employer intends to fill this role. They are test-driving candidates, either for near-term budgetary or cultural (read: “do you fit in?”) reasons. As with pure contract roles, in the past contract-to-hire gigs were 6-12 months. And, while full-time employment was typically offered during or at the end of this timeframe to valued resources, contract extension was also on the table.
These days, contract-to-hire means that the company you are contracted with may approach you at any time during your contract regarding going full-time if they are pleased with your work. They’ll mean it, and typically, they’ll do this sooner rather than later. While the employer will need to “buy out” your contract from the placement firm, often this more financially viable than paying 10%-20% on top of your hourly rate at contract status ongoing.
This is great news for resources looking to “feel out” a company and hopefully turn temp work into FTE status. However, if you are moving to contract work to reap the benefits of a more independent and self-managed work path, it can mean the end of your contract, at the end of your contract. They’ll fill the role, with or without you.
In contract-to-hire situations, it’s important to find out the salary range and benefits offered for FTE status ahead of time from your placement firm. There will likely be a significant difference from contract salary, and you need to be prepared to balance your intake against employer benefits. During the interview process, asking how many contract-to-hire resources have been hired/extended in the past two years is also fair.
3. Freelance: True freelance work can come in two forms: working directly with a company as a 1099 resource, or, being placed on contract with a company by a placement firm and being paid as a 1099 resource, as mentioned above.
1099. Again, this means you are paid the full amount of your hourly rate, with no taxes taken out, and no FICA coverage. April 15 will become an important date. However, because freelance gigs are typically based on an immediate need, you can afford to ask for a higher hourly rate. Just understand the tax implications. You are self-employed. (And, if you plan to work freelance on a regular basis, setting up an LLC is a good idea.)
If you have a large network to source from, securing work directly with the company/companies you’ll be executing for is beneficial in a 1099 situation. You will be getting no “benefits” from a placement firm in a freelance scenario, but it may take from the hourly rate you can command. (For example, if a company is willing to pay $50 an hour, a placement firm could take $10 of that per hour, leaving you with a $40/hour rate you might make as a W2 contract employee, alleviating a lot of tax implications.)
Freelance is a terrific option for interactive resources with a strong background in a particular area and the ability to juggle multiple projects at times. It is more typically an option for resources that are highly active during one phase of a project (design, copy, development, etc.) but I myself have, and I have seen others find freelance work across all areas/phases of interactive projects and roles. Note, too, that direct freelance (e.g. no placement firm involved) is far more common on the agency side than in the client side. So, to find freelance gigs, your agency colleagues are the ones to talk to.
That said, any 1099 contract opportunity offered by a placement firm is worth considering – just blend the pros and cons listed above before you say yes.
A note on freelance: while the gigs “may” be shorter (my own experience proves this wrong) freelance work is a real opportunity to shine – and to build your resume, personal brand, and excellence in a particular area. But be ready to network and promote yourself – beyond Twitter. Have an amazing online portfolio at a bare minimum (yes, even if you are not a designer), as well as a resume that speaks to your freelance abilities.
In Closing
I have sincerely enjoyed the contract and freelance work I’ve done for the past six years. (Not knocking the FTE work done prior to that.) But, I take each opportunity as one to excel, learn, network, and truly help the company I am working for, efficiently and immediately. Certainly I have weathered many times where the next gig needs to be lined up – and that is where dedication, engagement, and sincere passion for what I do have paid off. And, should you choose one of the paths above, it will for you as well.
In the coming weeks, I will share insights about the tax and benefit implications of taking on contract and freelance work. Worth a read, and as I mentioned, nowhere near as scary as they sound.