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« It's Still Not What You Make, It's What You Spend | Main | Adoptionomics, Part 3: Temporary Tightwad Tactics to Offset Adoption Fees »

October 08, 2007


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Are you really giving up that much in salary? Here is my computation (assuming you work full-time in contracting):

$80 per hour x 40 hrs/week x 52 weeks a year = $166,400
Less $1,000 a month for health insurance = -$12,000
Less 7.65% self-employment tax on current earnings = -8,750 (SS tax ceiling of $97,500)

The "net income" is $145,650

That doesn't factor in education opportunities, 401(k) match, stock options, and most importantly vacation time. I guess the question is: Is that worth roughly $35k?

It sounds like you are pretty burned out at the government gig and fired up about the new company, so I think you already have your answer. If the new gig doesn't work out, it sounds like you could probably try to get another contract without too much trouble.

Good luck with whatever you choose!

I would go with the new gig. The numbers above would lead me that way. Having a 401k plus the matching will be aswesome down the road. Also, vacation. Sometimes you need to change you direction in order to inspire yourself. I am doing that right now. It's difficult, but the road less traveled is usually the best.

Good luck to you!

Health and happiness are the most important thing. If
the new job makes you happy I would take it. Even if
you make less money you could always do extra work on the side. Plus, you have a secure job and can get rid of the hassles of being self-employed.

Go with what you will enjoy most. A boring unsatisfying job is not worth the money.
- Jeff

Take the new job. Sounds like he's excited about it. And staying current in IT is important if you're going to keep earning at the same level.

Benefits average 30% so $110k is equivalent to about $157k, so the difference is not that great but it is a little less and you will lose tremendous flexibility going from contractor to employee. Be prepared to pay much higher taxes. Forget about spending whatever you want on your education, contributing huge sums to retirement accounts, and covering whatever costs you feel justified for business. 401ks max out at modest contribution levels, matches may be meager and may not vest very quickly. Medical insurance may be worse and more expensive, so make sure you know what options you have and what you will have to copay (you probably thought it was just included, but it often isn't other than a portion these days). Options could be the best thing here or they could end up worthless.

That said, it sounds like you are ready for a change. Does it offer an upgrade path? If it fails, would you look for another position or return to contracting? Will you really be comfortable working with others? (It is always hard to tell going in but did you get any feelings about it during the process? This is probably the most significant question.)

I'd strongly consider the new opportunity. I'm also a gov't contractor in IT for a large company. However, I've been on the same contract for about five years, and starting to feel the need to do something new, even after getting a pretty substantial raise last year. IT is so rapidly changing that it is vital to get experience with new technologies. If your current job isn't giving you opportunities to learn new things, then you run the danger of becoming the equivalent of yesterday's mainframe COBOL programmers.

Also, since you already have the experience in running your own business, you can always switch back to this arrangement, and you'll have a new set of skills.

I'd take the new job. Just the educational opportunities are worth it, not to mention the loss of headache of constantly thinking about new contracts.

Not being able to develop new skills is really dangerous in this field. I am a software engineer, so our jobs are related. You have to keep your skills up-to-date or you cannot compete with young kids right out of college, not to mention folks in India and China.

I would, however, agree with Lord is that you need to learn everything about their benefits - details of health plan, 401K match, educational opportunities, etc.

I'd say jump now. It's not only the money which, after the benefits are figured in, aren't that far apart. You have to consider the additional knowledge you'll gain at the new position, now and in the future. You'll also gain some great insight working for a fast growing small company. If you haven't done it before and you have an entrepreneurial bone in your body you owe it to yourself to go that route at least once. In addition, You'll also gain invaluable networking contacts and have a good start on a 401k. As for the potential stock options, it's a nice dream but don't let that weigh too heavily in your decision. I had 80,000 shares of stock options I had to reach by submarine, but it was a great ride, and if they would have only made it to $10/share, my strike price was .75, so it would have worked out pretty damn well for me.

Take the leap!

I was in a similar "opposite" position about 2 months ago and the advice here is spot-on. I would have been going from being a government contractor with a very large company on a huge contract to being an independent contractor for a small company on a small government contract. The insane tax-rate (30%) as an indy contractor and funding my own health/disability/retirement/education benefits added up so quickly that the offer I was given was inadequate and would have resulted in 30-40% less money. When the loss of unemployment insurance and the loss of many worker rights was factored in it became a terrible deal for me. In the IT field if you're not progressing your skills you're not just becoming stagnant but falling behind and it only accelerates downward as time goes on. I'm experiencing this at the moment after several years at my job as a unix sys admin 2 which while giving me experience also limits the type of work I do and is preventing me from becoming more well-rounded and experienced with newer technologies. My company is only interested in filling the slot I'm in rather than investing in me over the long-term and making me more marketable for future contracts. A degree has helped to make me still somewhat marketable but if I was to go over to the civilian side I would be behind the curve to say the least as the government is often so slow to invest in rapidly changing technologies and the laundry list of qualifications and certifications needed for even lower level IT jobs becomes even bigger. Interesting work that progresses your skillset and is stable trumps higher pay to me every time. I would see working for a cutting edge company at lower pay worth it just to gain the experience and skills which could be used later on and result in a higher billable rate if you went back to work for yourself.

I agree with everyone's advice that although we all focus on money, if you can add happiness in another major aspect of your life such as a job where we spend just about half our waking hours then you should definitely go for it.

I do disagree with the first posting's calculations though. He compared after-tax income in the current job with the pre-tax income in the perspective job, that's not really comparing apples to apples. Here is my modified financial comparison for the two jobs:

Current job:
$80 per hour x 40 hrs/week x 50 weeks a year = $160,000
Less $1,000 a month for health insurance = -$12,000
Less 7.65% self-employment tax on current earnings = -8,750 (SS tax ceiling of $97,500)
Total: $139,250
+ short commute
+ flexibility
+ business deductions
I've accounted for a two-week non-paid vacation, since I'm sure you have to take a break at some point.

Perspective job:
Salary $110,000
Less ~$200/mo for health insurance/co-pays = $2,400
Less ~10% more in income/payroll tax than currently x $110,000 = $11,000
Total: $96,600
+ 401(k) matching contributions (free money from employer)
+ paid holidays/vacation
+ cheaper medical insurance
+ stock options
+ challenging/exciting work environment

Hope that helps.

The money is close enough that it shouldn't matter, assuming you can manage either way. Go with whatever seems like the best job.

I'd say keep contracting and start your own business. Also, full time employment is not as stable as it seems. You will make more money.

Creative Investor:

Why the 10% more in income/payroll tax than currently? I wasn't aware of that, and I'm just curious what that is.

I'm a self-employed individual running my own company and I vote for remaining self-employed. First, I'd like to point out that the OP states in his letter that he's incorporated and thus pays less taxes than your standard FTE. I'm going to go further and assume (Yes, I know about making an @** out of U and Me) that he's actually incorporated which means he doesn't pay self-employment taxes and can write off far more than a standard SE who is not incorporated. So, even accounting for SE taxes, no paid leave and the necessity of paying for his own insurance, the difference in pay per year is over $40K. Does anyone here truly believe that they couldn't fund their own retirement accounts, take an evening/weekend continuing education class at your local college and pay for a nice two week vacation wherever they'd like in the world on $40K?

As far as I can tell, the ONLY items in the "positive" column for the new job would be the OP's excitement for the work (which MAY fade in time), the opportunity to learn new skills (which can be done with continuing education courses and the people he would be working with. All important factors, but unless he truly HATES what he's doing now, nothing that cannot be worked around with an extra $40K a year in income.

Geekman, even if he has a corporation, he still needs to pay payroll taxes on the salary he has to draw from the company. Otherwise, all the earnings will remain in the corporation and he will have no funds to use for personal expenses like housing, food, clothing, etc.

True, but as a corporation he could write off as much as possible as a corporation and then pay himself whatever is left over as a "salary" and claim the corporation merely broke even for the year. And then afterwards he could also write off whatever he could as an individual on his personal taxes. He could do all that _before_ he pays taxes in March for the corporation and in April as an individual. Also, by having a separate business and personal checking account, he could transfer to his personal checking only what he needs each month until the end of the year so that he keeps his "salary" very low compared to his business earnings. On a theoretical $100K in actual earnings a year, doing your bookkeeping and taxes in the manner I described above can lead to paying taxes on only $40K, instead of the whole $100K.

Makes a BIG difference come March and April.

Geekman - he stated in his question to FMF that he had "low overhead" so it is doubtful there is much expense to write-off there. No way is he going to write-off $60k in expenses to get from your $100k to $40k. And if he's spending that much in expenses, he is better off going to the new company anyway since his salary would be $110k.

The "transfers" you are talking about would be considered dividends, salary, or a loan to/from the company which would have to have interest accrued on it, all of which have tax implications. There is no way of getting money out of a corporation without some sort of tax problem since it is a separate legal entity.

don't really get what the big issue is here. figure out what your goals are and make a decision. pretty easy to me.

complaining about not having 401k etc is a bit odd considering if you are self-employed, you can set up a solo 401k, SEP IRA, for education you can set up ESA or 529. for other benefits, negotiate in your contract with the govt.

if you want to move, then move. you also forgot that you would no longer be working for yourself, but for someone else. when doing a comparison, don't be biased towards one thing when war gaming your choice. you have negatives in staying as a contractor but no positives. have you renegotiated your contract? Have you looked into more rewarding and challenging IT contracts with the government (there are plenty out there)? you have positives in working for the new company, but no negatives. you listed the company has tons of potential, which sounds like a startup to me, which has some definite risks and negatives so there aren't any guarantees that the potential is realized. there's also the real possibility that the company could do an IPO, then again there is no possibility. Then if IPO goes, there is no guarantee that your heavily invested company stock 401k is going to do anything but decline. grass always looks greener from the other side of the fence. make a REAL positive and negative matrix for both jobs and weight factors that are most important to you rather than steering your choice from the get go, which it seems you have already done.

Happiness trumps all, but having a good contract as a small company is nice. My brother and I are in the same situation. Our contract work is pretty mundane, but our rates are high. We use the profit from the high rates to fund R&D and do the work we want to do. It really depends on what type of person you are. Personally, I like working for myself.

You say you're incorporated - S corp or C corp?

It sounds like you work in the offices of a government agency - can you work holidays? If not, you have about two weeks that you're not paid for holidays, so deduct that from the income.

Do you do all of the corporate bookkeeping, billing, etc. on your own time outside of the work hours - more time spent not accounted for.

Do full benefits include life insurance, disability insurance, etc?

There are a lot of details left out, a number of which are mentioned in previous posts.

As someone who owns and runs a small professional services business, I suspect the difference in pay is less than you think.

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