I got a proposal recently from a medium-sized custom home/timber frame builder. They’d like me to do foundation, framing and finishing work. They offered two remuneration scenarios: payroll employee at $26/hr, or subcontractor at $32/hr. For the higher figure I would provide vehicle, tools and cell phone. Materials and extra labour supplied by the main contractor. All work within 70 km/40 miles of town, much of it within 15 km radius. I’m getting a little bored and a lot frustrated with the lack of advancement at the commercial outfit I work for now, and the money is better too, so I’m giving this one some serious thought.
Discussions haven’t yet gone into great detail, but I’m trying to figure out if the sub option is worth it or not. I don’t have a cell phone so not sure how much that would cost, but surely I can keep the bill under $150/month, or about $1/hr. The truck I have now is an old Ford 3/4 ton 351 that sucks gas so severely I’ve been driving a beater 4 cyl car to work for over a year now. I’d estimate $4000 a year in running costs if I had to drive the truck for work, so about $2/hr accounted for there.
So I can see $3 of the $6/hr gap between the two options already accounted for. The big unknown is what my tools are worth on an ongoing basis. Will $3/hr ($6000 a year) pay for replacements and/or repairs, and acquiring new tools? I need a few things to make me independent – like some decent ladders and a laser or optical level – but for the most part I have all the power and hand tools needed to get going.
I would hope that the tax benefits of being a contractor would effectively add a couple more dollars per hour since I could depreciate tools, deduct vehicle expenses and so on, but I’m not sure how much that would work out to over a year.
The last 3 years I’ve been doing small private jobs as a way of paying for tools and acquiring some pricing and estimating experience. It’s always been in the back of my mind to branch out on my own eventually but the stability of a steady job with benefits has been important too. This offer seems like a fairly sheltered way to start out as a sub – guaranteed revenue without significant capital input. The precarious part is that I’d be a business with a single client, although I guess as a regular employee I’m in the same position of being at the mercy of the boss. My thought is do a couple of years in this model and then move onward as an independent contractor. The business climate is pretty forgiving at the moment with a busy economy and a dire shortage of qualified tradespeople.
What do you guys think? All comments, random thoughts and scribblings welcome.
Replies
Don't forget WCB, if you go the sub route....
The difference between those two figures doesn't seem anything like enough. I think the sub-contactor figure needs to be MUCH higher.
John
If I were given that choice I would take the employee route. Out of your 3 dollars an hour remaining you still have to cover the employer half of payroll taxes, workers comp if needed, FICA burden, tools, truck repair, cell phone damage, etc. etc. 6 bucks doesn't cover much. Ask for 12 or take the employee route is my vote. DanT
& don't forget profit
bobl Volo, non valeo
Baloney detecter
I think the other guys are 100% correct. The sub pay should be roughly double the regular pay route.
This guy is trying to bait you with a little more money, hoping you'll take it. Sounds to me like he's hoping you're not too bright, and it will save him big bucks in the long run.
Same deal here. Hes just trying to better "himself".
Tim
Sly,
Adding a cell is minimal, and ins. on it is an extra 5 bucks. As a contractor, Ive had my plan at 400 peak minutes and never gone over. My neighbor, in Mortgage, has a 2000 min plan and uses most of his. You can usually tell after a few months where you need to be. Mine is about $50.
Im thinking that the headaches of subbing, and the paperwork alone is much more involved then you think. Copy of Quickbooks and the time to fill it, no benefits, other cost that has been spoken of. Accounting at the end of the year... paper on that, its pretty involved.
Im not sure which guru it was that said it, but there is this quote that says "working for your self you only have to work half days, but you have to decide if its the first 12 hours or the second 12 hrs.
Non billable hrs can really kill your income... you dont have to work with materials at the moment, but keep it in mind.
If I had the choice Id go with employee. There are many benefits of having your own business, but it has to be worth it.
-zen
Go for the hourly wage as an employee. Ask for a guaranteed 40 hrs a week.
Edited 10/9/2005 8:04 am ET by Matt
How about insurance? As a sub you'd have to provide comp, liability, and disability for yourself and your men.
your truck should be renumerated at a minimum of .30 per mile.
tools costs are harder to pin down. Figure half the replacement value of any thing you might use on their job. Anything from pencils to diamond blades and everything in between.
The IRS rate for '05 is 40.5 cents per mile. Every tax person I have ever talked to strongly suggested sticking with their rate.
Actually they just bumped it up to $48.5 from 9/1 to 12/31.It is certainly OK to take actual expenses, and that includes depreciation. But the paper work can be a pain and IIRC once you take milage you can't go back to actual, or at least not easily.
By jove you're right. I'll have to rewrite that check I wrote for July, August, and September!
i think the irs rate went up the last qtr. to .48 / mile.
IRS figure for mileage was $.385/Mile a couple of years ago and the real cost hasn't gone down since then. At $.30/mile, he would be losing almost 1/3 of the estimated cost.
"I cut this piece four times and it's still too short."
Another vote for employee. One of the risks you take as a sub is that you get hurt and have to ding your own worker's comp policy. Currently I pay $2.79 per hour in the 'wood frame building construction' category, and have an experience modifier of 0, but one claim and that will increase to 1.2 and my rate will then be $3.35 per hour.
Others have covered the issues of doing your own payroll. You can do it with or without software, but it's sure easier with. Quickbooks with a tax table is ~$400 and then you need to operate it. It's the end of Q3 right now and I have about 4 hours of filling out tax forms to do. Any mistake there and they ding me for penalties and interest.
You're in Canada and I don't know exactly how it works there, but I'm sure the bureaucracy is similar. Oh, and what he is proposing would not be legal here, per the IRS.
If he's paying $26 employee it would be a minimum of $39 as a sub (150%). The GC should be able to sell you at $52 (200%) or more.
Hey Sly
I'm in Victoria BC and those are pretty much the going rates here . I get a couple bucks more than that as a sub but I run a crew and do site super duties as well. I've gone the sub route because although I don't make any more on paper ,I make a killing on taxes.
My truck ,gas ,tools,clothes,cds,some food,home 'office',workshop, is all a write off.Buy more tools pay less tax ;)
I use an $$ accountant and have survived Rev Can audits without any scrapes.I have my own WCB and disability ins.
The company I work with replaces any tools I break at work and supplies any bits blades etc.
On some jobs I supply bigger tools for crew use or workshop use but then charge extra for as well.
The only downside I've seen is no EI and self employment can be seen as a liability by the bank if you are borrowing.
I finished my apprenticship in 89 and have been subbing almost all the time since, In this Province I have never been out of work for more than a week at a time.
regards
Rik
Thanks to everyone for the replies. I haven't had extensive discussions with these guys yet; I always viewed the sub rate as a starting point. The side work I've done to this point has been at $35/hr and I recognised early on that if I were doing this as a subcontractor I'd probably need to charge more to cover legitimate business overheads.
However, the mitigating factor here is that there would be little or no time spent finding work - I would only need work 40 hours to get 40 billable hours. That's rare in this business and certainly worth something. Second is the fact that I wouldn't need to have a payroll and its attendant expenses, because labour would be provided by the GC. This in turn means that I can forgo WCB provided I have disability insurance (I already do). I wouldn't be carrying materials costs, and consumables (saw blades, drill bits etc) would be paid for by the GC.
This is a hybrid animal, not a fully independent sub but more than a payroll employee too. Meeting the Canada Revenue Agency guidelines for contractors will require some finesse.
I'm a fair way from making decision yet. I'm still having discussions with my existing employer, letting them know I'm not happy that I'm not happy about being passed over for promotion in favour of unqualified people with less experience than myself. The trades shortage is so dire that they are concerned enough to talk with me rather than throwing me out on my ear, which was the usual fate of those who entertained outside offers back in the bad old days.
It seems to me that I need to negotiate a better rate if I decide to leave and go as a sub. I'm not counting it out because there are tax benefits to be had, plus the chance to learn and build a foundation for a future as an independent contractor. If the numbers don't add up, the worst case is I go as an employee with a pay raise of several dollars per hour over existing.Lignum est bonum.
You should know how much your truck and fuel are costing now. What is left over? Did you include funds for maintenance and other little "surprises"?
A new, more efficient truck or van will certainly cost much more than the paid for Ford. Fuel on top of payments can really suck.
Will that amount be enough to cover forseeable tool expenses for your situation? Of course, they are tax deductible, but you have to have the money first. It would suck to front several thousand dollars for tools that are needed now.
The tools will be yours, so better care is a certainty. Good tools will not break too often. What about tool insurance?
In the USA, you can only claim mileage or expenses on your vehicle- not both. Depreciation will only be allowed for the percentage that the vehicle is used for work.
Might want to talk to your tax advisor.
As a sub, you may be responsible for all warrantee work on your own time. As a sub, you will be named in any lawsuits relative to the work you did, or the work that was done by any "Extra Labor" crew working under your supervision. Your risk is not being fairly rewarded.
Hi Sly,
What kinds of employee benefits will you accrue if you are put on their payroll? I typically gross-up wages between 40% - 50% to account for employee benefits; of course, everyone has a different Workers Comp experience rating, and premiums, so that can be a significant variable. Will your medical insurance premiums decrease if you become their employee?
Going on their payroll could significantly change your cash flow. If you're used to being paid gross and filing quarterly estimated taxes, you may be surprised by the way things change when you're on someone else's payroll and they're withholding taxes. If your current obligations are predicated in your current cash flow, you may want to crunch the numbers both ways.
For comparison purposes, you may want to see what the current federal mileage reimbursement rate is and recompute the value of your truck. The difference between that cost of fuel and the federal reimbursement rate can be a reasonable basis for the calculation of imputed depreciation and maintenance on a new vehicle - important limits to keep in mind if you're working as a sub and itemizing business deductions. If your'e going to put 15,000 miles-per-year on your truck working as a sub, and the federal rate was $0.485/mile, that'd be $7,275/year. At 15MPG and $3/gallon, you'd spend $3,000 on gas, which would leave $4,275 ($356/month) for depreciation and maintenance.
Good luck,
-Jazzdogg-
"Don't ask yourself what the world needs. Ask yourself what makes you come alive, and go do that, because what the world needs is people who have come alive." Gil Bailie
Edited 10/9/2005 10:45 pm by jazzdogg
Sly,
I'm with a few others here. I don't think that the $6 an hour difference would be worth it. On the other hand, I also don't know how Canada differs from the U.S. on this issue.
By the letter of the law, what they are proposing as a sub would not fly here. I did however read one post from someone in Canada who said he survived an audit with just such a setup so maybe it's OK there.
Just out of curiosity. What tools/transportation will you need to provide as an Employee? What benefit packages and pension options if any will be available as an employee?
I would defiantly go the employee route.
A carpenter working for me @ 26.00 an hour (Mid level experience) would cost me and other 31% in burden or $11.16 I also give truck/ tool allowances in the neighborhood of $5.00 an hour. Totaling around $ 42.16. “As a sub you would burden your own overhead†and of coarse would be looking for some “profit.†Let’s add $18.00 an hour for a total of around $60.00 an hour. His $32.00 number looks pretty dysfunctional to me.
Tom
Working for nothing is not getting any cheaper.