By Dan Boudreau
Congratulations! For anyone with the slightest trickle of entrepreneurial blood flowing through their veins, it’s a glorious day when the boss offers to pay you as a contractor rather than as an employee. As an employee, you worked hard to gain your employer’s trust, earned your stripes, and got the contract.
Then comes the agonizing chat about how much to charge. This is when budding contractors need to sharpen their pencils. When it comes to business expenses, the boss will have a clearer view. Unless he is willing to share financial details, most employees will be ill prepared when it comes to figuring out how much to charge for their services, and most tend to bid too low.
Here are nine expenses that need to be covered in your hourly rate, if you’re going to survive the transition from employee to contractor.
- Employer Payroll Burden. This amalgamation of costs is often referred to as Mandatory Employee Related Costs (MERC’s). It includes the employer’s portion of employment insurance, pension, holiday pay and any other employee benefits.
- Insurance. You’ll need liability insurance and, as a contractor, you’ll be responsible for paying premiums for your own Worker’s Compensation coverage, as well as providing mandatory insurance for all workers under your employ. To learn about WCB costs, go to www.worksafebc.com and lookup rates and classifications.
- Rent and Utilities. Your business will have to have a home, and for many budding contractors that will be somewhere at your personal residence.
- Bookkeeping and Accounting. As a small business owner you’ll need to keep accurate records and complete year-end financials for tax purposes. Equally important, you’ll need to know, as owner, where you’re at financially at all times throughout the year.
- Legal. You’ll want a lawyer’s help in developing your agreement with your former employer, and there will be other legal purchases, such as licenses and permits.
- Marketing, Advertising, Sales. Even though your first contract fell into your lap through the good relations you’ve built with a current employer, you’ll soon be buying business cards and learning how to get the word out about your services.
- Tools and Equipment. As a contractor, you may need to supply tools and equipment that previously were provided by your employer. You’ll need to factor in the purchase cost, as well as the cost of repairing, maintaining and replacing equipment.
- Office Expenses. In today’s work environment, it’s difficult to imagine a business without a telephone, internet access, some sort of mobile, and a computer-fax-printer. There will also be a desk, chairs and something to store files and documents in.
- Bank Charges and Interest. A business needs its own bank account, independent of your personal account. If you borrow funds for business purposes, you’ll be paying interest on those funds until they’re repaid.
The Canada Revenue Agency is the final authority when it comes to deciding whether you’re an employee or a contractor. To locate tests that help to determine whether or not you’re an employee or a contractor, do an internet search using the keywords “employee vs. employer.”
As a contractor, if you’re charging anything less than double what the employer paid you as an employee, you’re probably not charging enough to cover your costs. Your appetite for contracting is more likely to grow if you start out with a healthy pricing strategy.
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When my computer gets sluggish, I defrag the hard drive to make it more efficient. Defragging is a process that cleans up your hard drive. It does this by tidying up stray bits of information to leave more free space, which enables the computer to operate more efficiently. Businesses need to be defragged on a regular basis too.