What does an hourly rate mean to you?
Recently, I somewhat stupidly made a Facebook posting that was a jest about what I do for a living. It was really about being a programmer and meant to be funny.
In this posting, I happened to mention that this new contract is $85/hr.
Immediately, I started getting friends and family saying things like “now you’re rich” and “I need to learn to do what you do.” Thus, I want to explain some things so that you can all put those thoughts to bed.
Anyone who thinks that hourly rate makes me rich or thinks they want to do what I do really needs to read this, because there are a number of issues you need to understand.
Let’s look closely at my $85/hr.
Wow, for a 40 hour week, that’s $3400!!
Wrong!
Issue #1: Contractors pay their own taxes
This is the most important thing you need to know. When you get your paycheck you look at it and know that it goes into your bank. You may look at your stub and think “Wow, I had x dollars removed for taxes!” but that’s as far as you have to think. The paycheck you get is the money you can spend.
Me? The paycheck I get is a fallacy. I have to take basically 1/3 of that and dump it into a separate bank account and very seriously not touch it. I can’t touch it because 4 times per year I have to send the government a check to pay for my estimated taxes.
And the penalty for screwing that up is emphatically not cheap.
Think about that. The paycheck you get is the money you can spend. The paycheck I get is at best 2/3 the money I can spend. That brings us to $51/hr.
Issue #2: Contracting is not a job
I am a consultant, not an employee. That means, I bid a contract, and I do the contract, and then I look for more contracts. What does bidding on contracts mean? Simply, it means that I may not find a contract for 6 months or a year. Seriously.
Think about it. I have this contract for a year, but in a year, I know that I will be unemployed- that’s part of my job description.
So, think about $85/hr when a lot of that has to go into savings to pay your mortgage when you end up- as you know that you will- unemployed. How much do you put into savings? We’re putting 6 months living expenses, most of that I’ll be putting in.
So, given that we don’t want to eat Ramen while I’m looking for another contract we’re down to about $35/hr.
I won’t get into the actual stress involved with knowing you are about to be unemployed. This is a financial argument.
Issue #3: Contracting is not full-time
Let’s put this to bed right now too. I don’t work on this contract during a normal 40 hour week (you’ll see later why this is not necessarily a good thing). I work on this contract about 1/2 time. So you do the math on how much that actually is. Granted, I can have other contracts running concurrently, it’s generally good if you do. But don’t start doing the “$85 x 40 hours” math in your head.
So far, it’s more like $35 x 20
By now, our exciting $3400/week has dwindled to $700/week.
Issue #4: Contractors have no benefits
You have a job, you probably have things like vacation, sick leave, medical. Your company may even contribute to your 401k plan. I have none of that. If I want to take vacation, I’m more than welcome to, but I don’t get paid. If I am sick, I can stay in bed and moan, but I don’t get paid. The benefit is that I don’t have to pretend that I can’t talk when I call my boss, because I don’t call them. But the fact remains:
I don’t get paid.
We’re going to see Jessie’s family in vacation- that’s not just the cost of tickets and spending money- that’s also a week that I don’t get paid. It makes vacations quite a bit more expensive.
We need to put money away for retirement, vacation, sick leave, etc. We need to do that ourselves, consciously.
How much do we put away? 10%? 12%?
We’ve decided to do 14%, because we’re going to have kids and whatever those costs are (college, etc) will be added to our retirement. 14% of $85 = $11.76
Rounding down, our $35/hr is now down to $24/hr
Issue #5: Contractors need to market themselves
This gets back to Issue #2. Here’s the deal, as a contractor, I can’t just sit and do a job and then let it end and start looking for another job. That pretty much guarantees that I’ll be out of a job. I have to be constantly on the lookout for work. The best way to do this, is to be constantly seen.
This, for lack of a better word, is marketing.
You’re reading my personal blog. That’s marketing. Yes, I write for myself, but I could just as easily write in a journal or a file on my computer.
I write here because you will see it.
It’s why I also have a separate programming blog.1 It’s why I have a website with the domain http://johnmetta.com. It’s why a search for John Metta will get you to me, not some real estate agent in New Jersey. Go take a look at my website- it’s nothing but a shameless “I can work for you” scam.
It’s soulless marketing at it’s worst.
Admittedly, I enjoy it, but going to conferences, giving talks, maintaining websites… it’s all marketing. I started the The Mixing Zone why? Partially because I like hanging out, but mostly because “I am that guy that started The Mixing Zone.”
I started RubyGorge for that same reason. Sure, the majority of the reason is so that we Rubyists can get together and learn2, but that’s not going to stop me from telling people that I am that guy.
It’s why I’m working with the community college to teach programming. Again, mostly because I think it would be useful to people, and give people another skillset with which to get a job. I work for the betterment of my community in an honest way.
But, I would also be that guy who started teaching programming.
It sometimes seems completely shameless, but I have to do it. I need work.
Admittedly, the stuff that I do to market myself is all stuff that fundamentally helps the community. Teaching, organizing meet-ups and user groups, open source software development. I could do stuff that just markets myself and doesn’t actually help anyone, I’m just not actually soulless.
What this amounts to is, to put it bluntly, a shit-ton of extra work. How much? I can confidently say that a full third of everything I do is either looking for work, or marketing myself as someone who is all of the following:
- Highly competent
- Not a troll living by himself in a cave
- A nice guy who likes helping people and is active in his community
- (Most importantly) Ready to be hired right now by you.
Fully 1/3 of my time is time that I’m working very hard and not getting paid.
Our $24/hr is down to $18/hr.
Issue #6: I have no office
You may not think of this as a big deal, but not being an employee means not having an office, and not having an office means that I have to pay for everything I need to do my job.
That $3000 development system that a company would have their employee work on? I buy that. The thousands of dollars in software licensing and subscriptions? I pay for that. The conferences I go to to learn more and market myself. I pay for them.
Simple things that you forget, like, say, a freakin’ desk to work on? A chair? I have nobody to pay for that. I buy it.
I don’t know what those costs are, but it drops our $18/hr down somewhere. Let’s be reasonable and say we’re now at $17/hr.
Issue #7: The joys of paperwork
I’ve estimated that fully 10% of my time is dealing with paperwork. Making sure I track my expenses, filing quarterly estimated taxes, invoicing and billing, tracking my time, etc. All that shit that your boss takes care of when you’re an employee so that you can simply pick up your paycheck and go home?
That’s no small task.
I’m a target for an audit, so I keep good records of where my money goes. I have 5 separate bank accounts for my business stuff alone- Accounts for taxes, accounts for the corporation vs consulting business, etc. I’m not including the bank accounts that Jessica and I share. This paperwork is a time suck, and loosing 10% of your time to it is something you need to remember.
The worst part? Even though I’m a mathematical modeler, I’m not even sure how to account for this?
It’s probably something like $50/hr for an account (ideally I’d work 40 hrs/wk, so that’s 40 hours * .1 percentage of my time * four weeks/month * $50/hour to pay someone. But figure they’re twice as efficient as me and that I can convince them to charge $30/hr to do it. That’s still $240/wk.
Or, figure 10% of my time is billing, invoicing, taxes, etc. So at $85/hr that’s $8.5.
That brings my rate to $9/hr?
Yeah, I know that’s not exactly right, but you get my point. 10% is not peanuts people.
Coda
The point is that– even if we exclude the argument about the value I am providing to my client– $85/hr is, at best, a fair price for what I do, and by many standards it’s somewhat low. I’m bringing the skills of a software developer, database designer, software development mentor, AND a mathematical modeler to this contract.
Anyone who says “I need to learn what you do” needs to think really hard about that statement.
I work an average of 12 hours a day. Side coding, blogging, marketing, doing taxes, and learning more and more so that I can be competitive in this challenging market. It’s part of why I’m a damn good mathematical hydrologist AND a damn good software engineer. I’ve been programming for 25 years and have two masters degrees- that’s a high price to pay by time we get to Issue #6.3
Before you think I’m rich, think about the fact that I’m actually bringing home about the same amount of money you- and in many cases, quite a bit less. The different: I’m working a hell of a lot harder to get it.
Before you think you want to learn how to do what I do, think about knowing that you won’t have a job in 8 months, think about filing quarterly taxes, think about expenses and invoicing, think about working at 10pm at night.
And most of all, think about this: Not a day goes by when I don’t wonder whether it’s easier to have my boss take all the risks and do all the paperwork. I’d just take my happy check and go home. Sure, it’s nice being able to go for a bike in the middle of the day, but the fact is that I’m usually too busy to actually DO it.4
Do you really want to work 12 hours/day to basically make less than $10/hr?
Think about it.
- A blog on which I wouldn’t write this article, because the programmers are viscerally familiar with it [↩]
- constantly learning and having more to provide a customer is another cost, by the way [↩]
- I didn’t even factor in the time spent working on projects that I’ll throw away just because I need to learn another programming language to stay competitive. [↩]
- Of course there are benefits, if it was all drudgery, I wouldn’t do it. I haven’t really talked about the benefits, because I wrote this to make a point about looking at an hourly rate and thinking it means a lot of money [↩]
4 Responses to “What does an hourly rate mean to you?”
I’m John Metta, writer, hydrologist, programmer, Irish flute and banjo player, cyclist, brewer, and a digger of all things tech, and all around friendly guy. Nestled snugly in the Columbia River Gorge in a town called Hood River, I survey the world as my own personal playground. Connect with me via email or circle me on Google+
Ok, nice explaination but I'd still take it. I still consider you rich in what you have, a good life, a beautiful wife and a busy and full life.
Great post John – it really lays it out plainly and without overstating the case. When I converted to contracting, it took about 4 months and $25k to survive that "inbetween" period of getting started, including things like the try and fail and try again at different marketing approaches cycle. I ultimately took a contract that has worked out well for a year and a half. But, we as a family of 4 have barebones medical (that we buy on our own), no dental (my children have never been to the dentist), no vacation days/paid holidays/bonuses/stock options, and I am also a high risk for audit (great point, btw) since I work from home. I'm also at a tremendous risk of burning out since I can't stop working and still get paid.
That said, I am tremendously grateful for the work, enjoy the project, and I wouldn't trade my working at home for any other gig right now – I really love it. BUT, the cost is significant in so many ways.
I really appreciated the numbers breakdown – gives me a lot to think about as well. I work through an agency which alleviates me of some of the paperwork for federal taxes, but I still do all my own state stuff. Not to mention the agency is taking a LARGE portion of my gross through them (they won't disclose but my estimate is about 50% tacked onto my bill rate), which makes me a constant target for being let go because I'm so "expensive". I'm working on solving that problem now, but it's a stress that keeps me up at night.
Thanks again – excellent work as always.
Well done! This is something I've had to explain to a lot of people, including clients, when I tell them about my hourly rate. Wonderful job, and something I'll definitely be sending out to friends and family.
Frankly I hate freelancing, as a 3D artist I'd far rather be working at a studio, not only for the reasons mentioned above but in a studio you're also working with other people, not just sitting at home by yourself. You can learn from one another, bounce ideas around, collaborate on one project together, It's a much more fulfilling experience. IMO When freelancing I often have to take my laptop to Starbucks to work just so I don't go stir crazy at home.