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I have seen most people changed from being a contractor to being a full time employee, but not the other way around.

And that happened in startups that had maybe 20% chance of IPO or being acquired, and another that had maybe a 50% chance.

As far as I know, the rate (even for a 3 year experience graphics designer, or a programmer), can be $75 to $80 an hour. While a programmer with 15 years of experience may get $120,000 per year. So, the programmer with 15 years of programming experience earns $10,000 per month. At the same time, the programmer with 3 year of experience or the graphics designer will get $14,000 per month ($80 x 22 days x 8 hours). I know I have to buy my own insurance, but I can't imagine buying those for $4,000 each month... maybe $200, $300 at most. I probably need to pay Social Security (FICA) both way (myself and as self-employed = $210 x 2), but still, each month there will be extra $3,000 of income.

So is the above calculation correct? But most often, I do see contractors wanting or becoming full time, but not full time employees becoming a contractor. Does somebody know what the reason is?

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Stability is one reason to go FT. Families need stability. How much does it cost to insure a kid and a wife through private insurance? Other benefits are costly too. Not to mention no bonuses, profit sharing or other perks. Also, HR doesn't like to convert long time contractors to FT. So, if you need any of these things in the future, it will be that much more difficult. –  P.Brian.Mackey May 6 '11 at 20:52
    
So if I am single, and I want to do programming as a craft, instead of "managing people", and the startup has no bonus, no profit sharing, then I might be in the wrong path for being a full time employee? –  動靜能量 May 6 '11 at 21:01
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All 10+ years experienced programmers I know are making more than 200K USD a year. I personally made more than that with only 5 years of experience when I was actively freelancing. Fear is the only reason people don't become contractor. The stability they are seeking is a perfect illusion. –  user2567 May 7 '11 at 7:52
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It's also simply easier. As a contractor you are 'interviewing' with the company every single day you're there. You're building relationships and creating connections. The transition to full employment is low-risk for the company because they know you. As an FTE, you face a lack of credibility when turning consultant. You probably don't have enough industry contacts to get steady work, etc. The transition is not equally easy in either direction! –  Andrew Heath May 12 '11 at 5:56
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@Pierre303: No way average salary in EU is 200k/year? –  Coder Dec 21 '11 at 19:44

11 Answers 11

You missed some things in your calculations:

  • Employees are paid for vacation, holidays, and sick days, so the days FT programmers actually work is more like 20 per month. If you did the same thing as a contractor at $80/hour, you'd gross $153,600 per year.
  • Contractors are usually out of work at times. Assuming a fairly common two months a year, your annual income is now $128,000.
  • At that level of income, the extra FICA is $6,621.60 per year, so your annual income is now $121,378.20.
  • Health insurance can be far more expensive than you're guessing. and you might not be able to get it at all. My wife and I are in our fifties, and if we weren't on COBRA, we'd be paying about $2,000 a month. Let's assume you're single, young, and have never had any health problems, so you only pay $300 a month, and your annual income is now $117,778.20.

It's not looking like such a good deal for your $120,000/year employee to switch, eh?

And when you figure in other benefits employers often provide, like subsidized vision and dental plans, life insurance, and 401(k), often with matching funds, being a full-time employee can be a much better deal than being a contractor!

A simple rule of thumb is that if you make $X,000 per year as a full-time employee, then you need to make $X per hour as a contractor to match that. So your $120,000 per year employee would need to make $120 per hour as a contractor; at $80 per hour they'd be woefully underpaid.

By the way, I'm a contractor right now, but it was a very carefully considered decision that involved both doing a lot of math like this, and considering lifestyle factors. If I didn't have affordable health insurance through COBRA right now, I might be looking for a regular job.

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I don't think I could ever consider spending anything like $2000 on health insurance. That's absurd. I'd go without. –  Kirk Broadhurst May 7 '11 at 10:47
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62% of personal bankruptcies in the US happen because of medical expenses. –  Alexandru Luchian May 7 '11 at 15:34
    
the FICA cost is probably not $6,621, because if you are full time, you pay half of that. So a contractor's cost is only half of that. Also, if I am in my early 40s, then that means my health insurance can be $200 or less a month, if I make the deductible high, as I don't mind paying $120 per visit... as I almost go there 0 times / year. –  動靜能量 May 8 '11 at 4:50
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@動靜能量: Wikipedia lists the the 2010 FICA maximums as $6,324.00 for the employer and $6,621.60 for the employee. I was off a little, and in 2011 the calculations are more complicated due to recent economic stimulus legislation. But Google will point you to the real numbers, you don't have to guess, and mine are in the ballpark. My point really is, speaking as someone who's done it for most of the last twenty years, it's far more expensive to be a contractor than one might guess. –  Bob Murphy May 8 '11 at 14:57
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Full-timers do not get properly compensated for 60 hr weeks though. Hourly contractors do, however. –  Job Dec 22 '11 at 4:58

Life happens. You start out as a contractor as those positions are typically easier to get but then you get married, settle down, have kids, etc.. and each places an increased demand on your time which leaves less time for the usually increased hours of contracting.

Even if you are close to an airport, traveling for work gets real old, real fast and eventually the urge to find something close to home sets in. When you are getting valentines cards from the TSA screeners, it might be time to hang up your wings.

With consulting, you are also moving from company to company every 3-6 months, which means a whole new IT infrastructure to learn, a new political minefield, and a slew of new names and faces. Some people take this type of change in stride but for others it also gets old after a while. Some people want to just worry about learning one place and one set of people.

Consulting companies tend to be very flat in structure, which means that if you are looking to move your career from IT into Management, you are quite limited in where you can go within the consulting company.

Corporate work is typically less glamorous and exciting and usually pays less but you get to be closer to home with (usually) almost no travel, regular work hours and a group of people that you get to know and be comfortable with.

In the end, it all comes down to the type of person you are and how you like to work. If you are all about the money and have no family (or a family that doesn't really want to see you that much), then go full Merc and get every dollar you can.

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Since you are probably from the US. I will first note that I am from India and the labour conditions here are different.

Here there is a stigma attached to being a contractee. People, especially older folks keep asking why you cannot get a "permananet job" . MAny opf them are simply unfamiliar with the hire-and-fire culture and think that a liftime job in one company is the best thing.

Another thing: you will find it difficult to get a bride even if you dont have a nominally permanent job.

Banks dont give home and vehicle loans to contractees.

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While contracting may be more accepted in the U.S. than in India, amongst at least some people and business institutions some of the same sort of attitudes exist. However, those attitudes are not universal. –  GreenMatt May 7 '11 at 4:17
    
+1 for the non US experience –  Ingo May 7 '11 at 9:59
    
"Banks dont give home and vehicle loans to contractees." Cultural differences aside, I would imagine this is fairly common everywhere. –  Kirk Broadhurst May 7 '11 at 10:48
    
i also find that we learn "don't judge other people in a shallow way", but most all other people judge us in a shallow way –  動靜能量 May 7 '11 at 16:15
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My wife and I bought got a mortgage on a house in the US as contractors; we just had to put down a higher down-payment, but it was no problem at all. –  Bob Murphy May 8 '11 at 14:54

It's almost certain that what you're seeing is something called Selection Bias in your sample. It's much more difficult for a manager to provide good reasoning for a large raise in costs than it is to explain a reduction in costs. As a result, the people who go from full time to a contracting position will not be still working at the same company. You're working in a situation with large numbers of contractors, and, relatively speaking, few full time employees.

Some people will offer other explanations, which make sense and probably have an effect, but likely aren't the most significant source of your confusion. Most of the explanations boil down to saying that transitioning to contracting is much more difficult a decision to make for most people, than the reverse. The reasons are complicated, and usually include (Endowment Bias, where having a guaranteed job means you'll need a much larger incentive to quit than you did to take the job in the first place), Status Quo Bias (people prefer strongly to not change) and Zero Risk Bias (people prefer, strongly, to move from high risk to low risk, and avoid moving from low perceived risk to high perceived risk).

Oh, and, laziness and stress aversion play into it too. A steady 9-5 job, with occasional overtime, in the long term, adds up to more work than contracting does. Contracting, however, requires occasional intense bursts of high productivity (such as finding a new job while finishing the old one), and has the increased stress from higher risk of instant job loss, and higher volatility due to tangential issues such as politics at the company and client satisfaction. As people get older, married, settle down, become more averse to stress, and learn that short term laziness isn't as bad as it looks, they'll tend to want a full time job instead of a contracting career.

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+1, I think the selection bias is the main thing. I've known a number of contractors who switched to full-time jobs at the same company. I've also known a number of full-time employees who switched to contracting - but never at the same company. –  Carson63000 May 6 '11 at 23:20

Most people don't have the stomach for the overhead of contracting--constantly looking for work, doing taxes, being personally responsible for keeping up with the latest technology, etc. You also need to bank a considerable sum (say, 6 months income) in cash you can have available if/when you hit a dry spell. You cannot just cruise as you can as an employee. You are only as good as your last client. You must vociferously defend your reputation. It's better to turn down a lucrative gig that is doomed to fail than have that albatross around your neck.

I started as a full-time employee 25+ years ago. After layoffs from two companies in my first five years, I switched to contracting and never looked back. I love making decent money as a technical contributor. I've taught myself Java, JavaScript, C#, Php, among others. I prefer staying out of office politics and love not being invited to interminable meetings. It's also a bonus that no one wants to pay me for more than 40 hours/week. You have to pay your taxes on time, pay through the nose for health insurance, and save for your own retirement.

There is no issue over being self-employed from banks in the US. My credit union only wanted to see a couple of years of tax forms. I don't carry ANY debt from month to month. My home, two vehicles, and RV are all paid for. Start with inexpensive and reliable, then pay yourself for saving money over ego.

If you need the social bonding of co-workers, contracting is not for you. If you get bored easily, try contracting. If you hate interviewing, don't contract. If you aren't very organized, forget contracting. If you prefer routine, go full-time. There are always exceptions, but these are generally true.

doug

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As an independent contractor, you have to be a businessperson who programs. You have to attend to insurance, keep the accounts, monitor your cashflow, pay taxes more often (or at least fill out the paperwork that says you don't have to pay taxes more often), do the marketing, the market research, take phone calls from other clients, keep your own education going, juggle your schedule so you don't lose a client.

As an employee, you can just be a programmer.

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This can be true but is not necessarily so. I work for a contracting company - they do my tax, insurance, superannuation, legal stuff etc. My workplace pays the contracting company, and they pay me. They find me jobs and so forth. They take a cut, obviously, but they get me into jobs which are unavailable (for legal reasons) to the individual man on the street. –  Kirk Broadhurst May 7 '11 at 10:51

I am going through this now. I am a full time employee, and will be accepting a position as a contractor. I am currently making $105K per year now as a full-time employee. In a few weeks I will be making $120 per hour on a two year contract, and only traveling half time (working from home the other half of the time).

Right now I am working 60+ hours a week, and my employer only pays me for 40 hours. That is the life of a full-time, salaried employee. As a contractor, I will be making $120 per hour EVERY hour that I work. What is that?? You want me to work this weekend??? You bet....$120 per hour.

I have a family of 6, and even then nobody (I repeat, nobody) can tell me that all the "benefits" and "perks" of working as a full-time employee can erase the difference between 105K per year, versus contracting at 250K per year plus.

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+1 for "You want me to work this weekend???" –  Tarun Dec 21 '11 at 7:05

Some people don't like the uncertainty involved with being a contractor and the self-marketing required. Where will I get my next gig? Will I get an extension? Why hasn't the client paid me yet? etc. These same people may feel that there is more stability with being a full time employee even though it may be a somewhat false sense of security.

As for your determination of what the contractors are making by their hourly rate, they may only be getting a percentage of the overall rate by going through recruiters/brokers. That might explain the desire to go full time as well.

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In my experience, people often go into contracting once they transition from the "junior" to "intermediate"/"senior" stages in their careers and need a change from being in a longtime permanent role which has gone stale....

So as others have already said: it's basically selection bias. It's typically almost "invisible" to you if you're an employee in a stable permanent-job-oriented company, because people quit and jump ship when they do this, and once they are contractors, you typically won't see them much in an employee environment (unless they are called to come into your company as consultants or something, and you meet them that way).

Now that I think of it, I don't know of any contractor personally who didn't get into contracting this way. But this is the thing: as far as their old "fulltime workplace" was concerned, they just quit and moved on. If you were working there, you probably wouldn't be under the impression that the person "went into contracting", unless you knew them very well and they told you the story. All you would know is that they "quit" and maybe "went to work for Company X". So it wouldn't register as a move to contracting.

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+1 I started contracting to get a bit more varied experience. Last time I was full time I was Head of Development at a small web devlopment house, work was interesting for a while but they weren't too keen on expanding out, just another shop each time, as a contractor I get to choose what I want to do and I currently value that much more than stability. –  G3D May 7 '11 at 16:49

The step from employeee to businessman usually takes place in the form of what is called "management buyout". Most often it's some middle managers with their staff who see business opportunities the calcined management above them is unwilling to attack. So one day they say good buy and found a startup. Often, in this process, the most valuable employees become co-owners and co-investors of the new firm. So while they're not exactly contractors, they have done the step from wage-slave to owner.

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If you are under 50 health insurance is cheap and you should have it. I am currently mid 50's, with a $5000 deductible individual health insurance policy currently $535/mo USD (just for myself). It has increased $50 to $75/mo for the last 4 years, I expect it will be $600/mo by this summer of 2013 and $1000/mo by the time I am 60. I started at about $200/mo when I was just under 50. 3 years ago I was in a bike vs car accident that permanently injured my shoulder, now I have a pre-existing injury. I checked into the new pre-exisiting policies in CA that will take anyone even if you have a pre-existing condition, the cheapest I found for my age was $1100/mo, another was $1400/mo.

So because of my health insurance costs increasing so much, I am back in the programming job market after a semi-retirement. I'm considering contracting.

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