Do you prefer being a full-time employee or working as a freelancer / consultant? Is one a better choice than the other? Which is right for you?
I’ve helped a lot of people transition from employee to consultant, as well as the other direction – and I’ve been both a W2 employee and a 1099 consultant. While there is no universally right choice, there are certainly pros and cons to each. It often comes down to a lifestyle preference.
Early in my career at Unisys, we hired a consultant to help us with some of our engineering projects. The guy was really talented, but no smarter or more capable than any of the other team members. Yet he was getting paid an hourly consulting rate nearly 30% more than everyone else. Surprisingly (to me), he didn’t want to be a consultant – he wanted to be converted into a full-time employee, knowing full well that his rate would be dropped back into the standard engineering range for Unisys.
I asked him why he wanted to take such a huge pay cut. His answer probably won’t surprise you:
“Anthony, I really want the security of a full-time job.”
But, the world has changed in the years since that conversation took place. There is no such thing as job security anywhere. Yes, certain states in the US make it difficult to terminate an employee, but for the most part, if the company wants you gone, you’re done. (I’m obviously not referring to gigs involving tenure or other forms of legal contracts that preclude a person from being laid off.)
Nonetheless, there is a certain prestige or status that comes with being an employee, and everything else being equal, a company will terminate consultants before its employees. So, you could argue that an employee does have a bit more “job security” than a consultant.
On the flip side, as a consultant, you have the benefits of higher pay (usually) and the tax breaks of deducting legitimate business expenses from your income. And perhaps most significantly, you choose the projects to work on and can be your own boss.
In many consulting gigs, you determine the hours you will work – although there will be times when you’ll need to align your work activities with the company you are supporting.
The first consulting gig I had required me to spend one day per week in the company’s offices – but the rest of the time was completely mine to schedule – so long as I met the agreed upon commitments.
Do Companies Want Consultants?
Why would a company choose to work with a consultant (and pay more) instead of hiring a full-time employee?
Many reasons, but here are some of the big ones:
A. Project Timing and Simplicity
The company has a specific task that needs to be completed in a certain period of time. If they don’t have the current resources and in-house expertise to meet the deadline, they can go through the lengthy process of onboarding a new employee and all the items that go along with that such as:
- back-and-forth negotiating of the salary/sign-on bonus
- waiting for the person to complete their two-week farewell to the prior company
- new employee onboarding for benefits/office/computer/phone/etc.
Or, the company can find a consultant that can do exactly what needs to be done and begin contributing within a matter of hours.
Furthermore, once the project is done, the company can easily (with no pain) end the contract with the consultant and part ways as friends.
Yes, the company will likely pay a higher rate for a consultant, but the company won’t be paying any health benefits or employment taxes (or any other benefits such as 401K matching). So, the hourly rate might be higher, but the overall total cash outlay is likely less. It also costs far less to end a contract with a consultant than it does to terminate an employee.
C. No Baggage and Perceived Value
A strange thing happens within companies (both large and small) – they tend to develop a certain set of politics and silos. And each employee is “granted” access to various resources based on their title and influence. Yet an external consultant has no baggage – at least none apparent.
Here’s an example of what I mean. We had one project at Unisys that required a thorough analysis across multiple departments (engineering, marketing, and sales) as we were developing a particular product strategy. We could have assigned an internal task force to pull all the information together, process the data, and present the findings.
Had we done that, the task force would likely have been stonewalled at various junctures, plus once they presented their findings, no one would have taken them too seriously since it would have been assumed the results were skewed toward what the individuals within the task force wanted.
By bringing in an external consultant, all those challenges can be negated – presuming the consultant has the cachet and expertise required. Which is exactly what we did at Unisys, and the results were superb.
D. Focused Specialization
While a company deploys employees onto a particular project, there might be a specialized skill that is only needed for a portion of the project. For example, a healthcare IT company might have a bunch of full-time developers writing the code, but need a database security expert to ensure all the right protections and reporting pieces are in place. Instead of hiring a full-time security person, the company might prefer to hire a consultant for just that piece of the project.
What are the challenges being a consultant / freelancer?
The big challenge with being a consultant or freelancer is ensuring you have enough gigs lined up to cover your expense requirements.
I don’t know too many consultants who have anything booked more than 3-6 months out. That is the nature of consulting work. One might reasonably ask, “Isn’t that scary not knowing where your income will be coming from in a few months?” But, if you have skills that are in-demand and you have the ability to network and/or leverage references/testimonials from past clients, then down-time is rare.
Another challenge that many consultants face is lack of human interaction. While some gigs require you to spend time in the company offices or interacting with other company employees, there are many projects where you are working alone. For many days, weeks, and even months at a time.
Perhaps you may welcome such seclusion. But I know many consultants who spend their working hours in coffee shops just to be within the din of human activity.
Some of the smaller challenges with being a consultant include responsibility for your health benefits, paying self-employment taxes, tracking hours and periodic invoicing, and purchasing your own office supplies/equipment. All of these are fairly simple, but it is work that needs to be done.
Is one path better than the other?
No. They are just different. If you are the kind of person who likes variety, being your own boss (mostly), choosing which projects you’ll work on, and having more “control” over your professional path – then you might consider the consulting route. But then you are also buying in to ensuring you have a sufficient runway to meet your expense requirements.
The simplest test I’ve found for determining whether someone is cut out for consulting is this: Does the thought of being your own boss, managing your own time, and choosing your projects get you really excited? If the answer is not a resounding “hell yeah”, then consulting work may not be for you.
I have a superstar software developer named Eli that I work with on many of my projects. He tells the story of his first (and last) professional gig as an employee. After only a few months of working as a “W2” Eli decided he never wanted to work for a boss again. Was his boss a jerk? Not at all. It’s just that Eli’s personality, work style, and drive is much more suited for consulting work. That decision took place many years ago shortly after he graduated from Drexel.
Since that day, he’s never taken a full-time job, yet the consulting gigs continually fell into his lap. Why? Because the work he does is in demand (application development), his work is exceptional (his clients love his work), and references/testimonials from past clients continually drive new opportunities.
The Best of Both Worlds
Considering a consulting gig but too afraid to leave your day job? Then try the best of both worlds: employee and consultant.
I know many people who have full-time jobs as a W2 employee, and they also do (non-conflicting) consulting work on nights and weekends. This is a great way to dip your toe in the consulting waters and see if you like what it has to offer.
But you need to be careful. When you accept a full-time job with a company, you will likely sign certain documents that determine the ownership of intellectual property, what you can (and cannot) do using company resources (e.g. laptop, stationery, phone, email servers, etc.), and what constitutes “company time” versus your own time. So, carefully review all documents (likely with legal counsel) before embarking on a parallel consulting business.
Getting Started as a Consultant
It is actually quite easy to get started as a consultant. While you aren’t required to incorporate yourself, it is wise to do so in order to benefit from the legal protection a corporation has to offer. Starting your own LLC is inexpensive – there are plenty of good legal/tax personnel who can file all the necessary paperwork and get you up and running for under $500.
You’ll also want your own website, email address, and phone number so you can begin marketing yourself. And all of those are also dirt simple (and inexpensive) to setup.
Here are some resources that might help you.
- Website – I recommend using WordPress – it is free and very easy to get started without needing to know any coding. But, you still need a hosting provider – this is where you register your domain name. I use a few hosting companies, but the easiest I’ve found is Bluehost. Their rates are good (about $5 or $6 per month) and setting up your own WordPress site requires not much more than one button click. Of course, the biggest challenge you’ll have is coming up with a good domain name that hasn’t already been taken.
- Email Address. If you use Bluehost, you get unlimited email accounts. So, if you created a new site called MyAwesomeSite.com then you can make as many <name>@myawesomesite.com addresses as you’d like.
- Phone Number. If you are comfortable sharing your cell phone on your website and with your clients, then that’s the cheapest way to go since you are already paying for that phone. But if you’d like to have a bit more of a professional feel, you can use Grasshopper which gives you an 800 number that forwards to your cell phone (without needing to give away your cell phone number). Grasshopper also lets you have custom greetings (e.g. Press 1 for support, Press 2 for sales, etc.) and everything else you’d expect in a “professional phone system”.
- Billing, Invoicing, and Accounting. You can either do it manually (spreadsheet to keep track of your hours, create your own invoices in Word/Google Docs to send to your clients each month) or you can use an online system like FreshBooks that costs something like $20/month. Another tool I’ve heard people rave about is Wave, which does invoicing, accounting, payments, and client management.
- Time Tracking. If you are billing hourly, then you’ll need to keep track of your time. You can do this with a regular watch or use a free tool like toggl. (Check out this terrific in-depth review of toggl.)
- Legal Documentation. You can use a local accountant/tax/legal firm, but if you are the kind of person who likes to do it on your own (and perhaps save a few dollars), check out Legal Zoom.
- Other Business Ideas. Besides consulting, are you looking for other ideas to leverage your capabilities? If so, you might want to check out my friend Chris Guillebeau’s book called The $100 Startup. In here, Chris shares success stories from many people who have built their own companies for less than $100. This is a great book for inspiring you toward channeling your passions and skills into a sustainable business.
Getting Customers as a Consultant
Let’s say you’ve got all the operational stuff out of the way (website, phone, infrastructure, etc.) – now what?
Reach out to your network! Let your peeps know about your work. But don’t just say “Hey everyone, I’m doing XYZ. Send me some business.” Instead, phrase your communication in a way that makes it clear how you can impact people’s business. Instead of “I do website design” consider something like “I help companies dramatically increase their user engagement and visitor conversion rates with my website design and customer funneling services.” And if you can follow that up with a couple testimonial quotes from prior engagements, you’ve got yourself a message worth forwarding.
Testimonials and references are the best methods of growing a freelance / consulting business. Having your prior work “sell” you is the easiest (and most effective) form of selling.
And if you are struggling getting your first clients, you might want to consider doing a pro-bono project. But don’t just tell the client “I’ll do it for free”. Instead, say something like this:
“My normal rate is $X per hour, and I am confident that I can _____ [some wording about the impact you’ll have for the client]. But since I’m looking to build my portfolio and reference base, I’m willing to do this gig on my nickel. However, I request two things in return if you are blown away by my work:
(1) that I can use you as a reference, and
(2) if you’d like me to take on additional projects, then we do so at my normal rate.”
You need to word that in a way that fits your particular style and vernacular, but you get the idea. This way, you aren’t valuing yourself at zero. You are valuing yourself at your normal rate, but are willing to do this project at no cost in order to show how good you are. Then, obviously, blow away the customer’s expectations and you are well on your way toward future (paid) work.
The decision to be a consultant (or a full-time employee) is not a “once-and-done” conclusion. You can move back and forth between the two over your career. There’s no right or wrong answer – just what is best for you depending on your interests and lifestyle at any point in time.
If you have any questions on any of this or would like referrals on legal/tax resources or help getting a website/email configured, just hit me up on Twitter @Anthonys_Desk or email.
PS: Many companies that are looking for both full-time employees and independent consultants regularly reach out to me for talented resources in my network that can help them. So, if you are looking for such work then reach out to me.
As always, wishing you much success in your career!