self employed vs hiring employees 3

[hikeandgolf]

I started my business in structural engineering about two years ago and have been lucky enough for things to have really taken off. My client base is growing and I'm at a point now where the thought of hiring is in the very back of my head. Has anyone else out there experienced the internal conflict of self-employed vs. hiring employees? I REALLY enjoy being self-employed, working from home, and being able to spend time with my wife and daughter even when work is insanely busy; however, I wonder if hiring employees would free me up to do more of what I like to do outside of work. I love and am passionate about the work I do, but I would love to have more time to play golf and go on some hikes. Nine months out of the year, I stay busy enough right now to have enough work for almost two people; however, my first few winters (January, February, March) have slowed down to where I only had enough work for me, but I'm confident that I could go out and get a lot more work if I did hire someone. But I do understand that having an employee(s) is a complete game changer in terms of dealing with personalities and all kinds of situations that can (and probably will) come up. And I understand that times would be potentially lean in the beginning if I did decide to hire, as the cost of hiring is muuuuch more than just a salary.

What I'm looking for is advice from other business owners who have either decided to stay self employed or who have ended up hiring, and pros/cons of both sides. Any thoughts would be greatly appreciated!

 

[IRstuff]

Another option is to sub out excess work.

TTFN
I can do absolutely anything. I'm an expert!
faq731-376 forum1529

 

[zdas04]

Self employed people own their business output. If something is good, you can be proud of it. If something is bad, there's no one to blame but yourself. You have complete control over the product/service you are selling. With employees you have all the blame (e.g., if your guys screw something up it is still your name on the contract) and none of the credit (e.g., "Billy did a great job on the project" not "Hike and Golf Engineering did a great job"). A lot of engineers have a LOT of trouble with that transition and find themselves working more hours checking their guy's work. Many engineers make the transition easily and trust their guys to do the job with minimal to no oversight. You really have to assess how good you will be at delegating before you take the leap. If you think you can live with the name of your company on work that you never see, then go for it. If that makes you cringe then you might want to think about how to turn work down.

If you decide to grow, sub contractors are the way to go. Professional employees represent a trap that can consume you. If you are doing something that requires hourly workers (e.g., product assembly, equipment maintenance, etc.) then you have no option to hiring W-4 employees. If you are employing engineers then their contract price is just a business expense without the need to provide insurance, match SSI, etc. Figure on billing the client about twice what your subs charge you.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist

 

[Ron]

Agree with the above. For over 10 years I have run my business as a consortium of consulting. I have no employees, but I have the resources of 7 people who work on projects I develop. Each is an independent contractor. The company provides no benefits and they are paid on a revenue sharing basis. The company provides umbrella coverage for general liability, professional liability, non-owned auto and worker's compensation. Most of them carry similar individual insurance as well. They are free to work on their own projects; however, I keep everyone busy enough that they work on my projects most of the time. All are "hand picked" and I've known all of the engineers for over 15 years. A couple of them generate their own work yet use our consortium as a resource as well.

 

[berkshire]

Hikeandgolf,
As a person who started out self employed,I speak from experience, you get to that point where you cannot manage the work flow by yourself. At this point you have to decide, do you WANT to take on more work and hire an assistant, or do you cut back on the work level, and stay by your self ?


Look to sub contractors before you hire Employees, they are more motivated to get things done , and when they are finished they will simply bill you and wait for the next job.
Hiring an employee now means you have to set up a payroll system, deduct taxes, both state, and federal, arrange with your state for unemployment compensation insurance payments, also secure workman's compensation insurance , some but not all states will let you skip workman's comp if you have less than 3 employees. You can hire Payroll companies to take care of this for you, but figure at least a 50% overhead before you give the employee a penny.
Now having said that, the person you hire can be a goldmine, or an albatross, with your first hire you have to be exceedingly careful, because of this.
However if you choose right, you will prosper and consider putting another on the payroll.
B.E.

You are judged not by what you know, but by what you can do.

 

[IRstuff]

In addition to all of that, you are now responsible for finding work for yourself and for your employee. Contractors are at will; they've accepted the risk of being unemployed.

AND, you're no longer free to drop work and go on an extended vacation, since you need to feed your employee. My wife's a doctor, so she's not really free to on vacation at will, since she still has to pay her two MAs, while not getting any income.

TTFN
I can do absolutely anything. I'm an expert!
faq731-376 forum1529

 

[moltenmetal]

If you have too much work, you could also hike your rates and/or be more selective about which projects you do. Some apparently find that raising their rates actually increases their workload...

If it's about money, then using employees to do more work so you can earn more money is a way to go. Doesn't sound like money's the issue for you though.

If it's about having more personal freedom, i.e. freedom to take time off etc. despite the demands of the job, then adding AN employee is unlikely to get you that. Rather, you're likely to be more chained after adding an employee, or three, than you were when you were on your own.

Subcontracting work or picking up the services of people on contract would be the 1st practical step, and might give you more freedom than having full-time employees.

 

[ehbadger]

TO echo moltenmetal; supply & demand! If you want to continue to be a sole employee (and are OK keeping your business 'small'), jack up rates to the point people start going elsewhere. Eventually the workload lightens and you can depress the rates again to original levels (probably wouldn't even drop that low before you get swamped again).

Disclaimer, I don't own my own business or anything, but while I was growing up this has been a decent strategy for my dad (self employed handyman) - when I can get him to follow it anyway.. he has a hard time charging people more and saying No to anyone

 

[hikeandgolf]

All outstanding advice from everyone. Thank you very much for your input. I do have a golf buddy who does some "moonlighting" work for me, and we have discussed us working together in the future. (Side note on the moonlighting issue: I am very careful to make sure he doesn't put his name anywhere on anything so that he doesn't get in trouble with his current employer and I carefully review everything and seal it with my seal...other than the check I send him it is my work that I'm taking full responsibility for as far as anyone else knows) He does excellent work and if the stars align, I would love to have him be my first full-time employee or independent contractor...it sounds like independent contractor is definitely the way to go if he and I would both agree that this arrangement is mutually beneficial. For me, creating free time outside of work is my main concern right now. Ron and others who have independent contractors working for you - how do you go about finding someone who is willing to be an independent contractor and how do you approach them with the idea of being an independent contractor instead of an employee? Right now I basically pay my buddy a percentage of what I invoice on the project - do you take the same approach? I'm assuming I would need to pay more than an employee's salary so that they could cover their self-employment taxes and pay for their health insurance. Is there ever an issue with the IRS saying that once an independent contractor makes a certain amount of money that they have to be paid as an employee instead? Ron, your business model sounds very appealing to me from what you described in your post.

In terms of raising rates, I am about to do so by the end of June...I have to with as much as E&O insurance is going up on my 2-year anniversary! With it being my first rate hike to my clients, I'm interested to see how clients respond.

 

[zdas04]

The IRS rules are all around "directing their work". If you tell someone what do do and let them do it, then they clearly fit the contractor definition. If you tell them how to do the work then they clearly don't. I know it is a gray area, but the IRS has a form that I've had to complete a couple of times that asks that question and as long as you answer that you don't tell them how to do the job then you're OK.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist

 

[IRstuff]

"Is there ever an issue with the IRS saying that once an independent contractor makes a certain amount of money that they have to be paid as an employee instead?"

As David indicates, the IRS has always looked at the autonomy of the contractor as a measure of employee-ness. Microsoft famously lost to the IRS because they labeled a bunch of their employees as "contractors," even though they had to show up to work during certain hours, and they were managed on a day-to-day basis by their ostensible managers. Therefore, much of what you might get hung up on is the actual contract and the statement of work to be performed. If their contractual obligations are solely work packages that are well-defined and do not require supervision or direction from you, that should be OK. Of course, the IRS probably won't bother with you anyway, given the low valuation of any additional tax revenue they could wring from you.

TTFN
I can do absolutely anything. I'm an expert!
faq731-376 forum1529

 

[Ron]

Interestingly enough, if I had the same people as employees, I could only afford to pay them about half of what they make independently. They pay taxes on the larger amount, thus the IRS gets more benefit from them as contractors than if they were employees.

If you want to grow a business and ultimately sell it to a larger firm, don't use my model. That doesn't work. I've been approached for a buyout twice in the past 3 years. Both were conventional corporations that put employees on salary. They can't afford to pay my people what they currently make. It doesn't work in their business model.

On the other hand, if you want to make a reasonable amount of money and work with people who enjoy their work a lot more than if they were employees and also not have the administrative nightmare of payroll, insurance, vacations and other employee issues, my model works well.

I have no need to supervise anyone in my group. They are all self-motivated, understand the tasks, and can get things done without my involvement for the most part. I provide support and consultation to them as needed, but they like the fact that they are not supervised or "bossed" by anyone other than themselves (or their spouses (we have male and female team members), as is always the case, employee or contractor!).....

 

[berkshire]

On subcontractors, only tell them what you want done, let them tell you how and when they are going to do it. If they are working in your building give them a key to the door. If you control access or start stop times, you are getting into employee territory.
B.E.

You are judged not by what you know, but by what you can do.

 

[tdstructural]

I'm self employed but I'm the subcontractor everyone is referring to. I assist companies like yours by working only when you need me. No OH costs, no taxes - I just send you an invoice once a month. In my area I bill you at $75 per hour and you can bill me out to your client anywhere from $85 - $175 per hour. I am a licensed PE but for my rate I work under "responsible charge" for you and you stamp my work.I think it works out great for myself and my clients.

I've even had clients hire me for a specified number of hours per week - example, 20 hours guaranteed while they grow and eventually decide to hire an employee. That way you can 'practice' having an employee without the real commitment.

 

[Ron]

tdstructural.....good for you, except you're working too cheaply! No firm in the US should be charging you out at $85 per hour. That's what the mechanics at the local garage charge. You spent a lot of time in school and bear a much greater personal liability than they do. You have a statutory obligation to protect the health, safety and welfare of the public....all that is worth more.

In my opinion, any licensed professional engineer providing services in the US should be charge out at $125 per hour minimum....more if greater than 10 years of experience, specialized experience or certifications. Our lowest professional engineer rate is $190 per hour. Given that, if you charge your client 67% to 75% of his charge out rate, you both make good money.

 

[swertel]

I have to agree with Ron.

I recently ran the numbers again.
To go full self-employed, my break even number is $95/hr if I work 40 hours a week with no vacation, sick time, downtime, overhead tasks, etc. It needs to be 40 hours per week of pure billable time.
To cover the down-time of no clients or wanting a vacation, handle overhead tasks like bookkeeping, or other non-billable tasks, $120/hr.
So my minimum will be $150/hr, which is still very cheap. When I have to bring in a consultant, the rate is between $200/hr to $400/hr.

--Scott
www.wertel.pro

 

[zdas04]

Me too. I defined my break even rate based on 12 hr/week. I do really well when I can bill 60 hr/week (average for the last 3 years). So far this year I've billed zero hours (I did have one flat rate job for $50, last year my income tax was over $100 k, this year it is looking like it will be less). The big trick is to take the long view. I take 10% of the amount I receive over break even and blow it, then I put the other 90% away for a rainy day, and damn 2016 has been a wet year. This technique has put me in a position to weather several rainy years back to back without changes in life style or business expenses. I highly recommend it.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist

 

[RocketRed]

To follow on with this thread, I find myself in roughly the same position.

I am an owner/partner in both a small Civil firm and small Surveying company. Work load is good in both and I need a drafter that I can swing into both companies. I need a person who has both civil and survey experience and I know just the right guy. Unfortunately, he works modeling for a structural concrete company right now. I tried to hire him directly into my engineering office, but could not offer quite enough for his needs. Basically, he needed an expensive health package and our provider was more expensive than the open market (Obamacare).

So, he and I have been working on setting him up as a drafting contractor. He has no business experience, but a great breadth of technical experience and a solid network. I personally have made arrangements for his office space, administration, insurance, and equipment - we are going to co-sign a small note for the start up costs. I could pay all of it in cash and he pay me back, but I am in the middle of a renovation project at home. The return is: a small piece of his company (for me personally, just a small fraction of monthly gross), precedence for my two companies over other projects he brings in, and the risk is on him to keep busy so if I cannot provide him work he does not hurt our overhead. The downside is that I will have to help with his sales and contracting for a while.

Because he is a startup, he can't workpay when paid, he needs to be paid monthly no matter if the client has not paid yet. If you are setting up your friend for a business keep the lag in pay in mind if he is going to be a contractor but needs a salary immediately.

It sounds like you are heading this direction, and I think it is the right one for both sides if you can make it work.

 

[MillR]

I've been in both situations and having employees makes more work for me than subbing out to contractors. The more people you hire, the more work you accept, and the worse the product seems to get and the personal dramas of them having to work together overtakes productivity. Consultants maintain professionalism and if you don't have work or don't like their work, they disappear. My only advice is to pay flat rates, if possible - I had a PE consultant that I could not bill the client for the number of hours she worked and I could only use her if we agreed in advance to her fee.

 

[hikeandgolf]

I've begun the process of finding one or two subcontractors to handle overflow work and potentially have an option or two. My next question would be how to handle an agreement with them. For those of you who subcontract work out, do you write up a separate contract for each individual job or do you have an up-front contract with each subcontractor and work based on "handshake" after the initial contract?