So, I was having a conversation on twitter about the economics of freelancing, and it occurred to me that a lot of my peers had no idea what the overhead of employing someone actually was. The business shorthand is that employing someone usually costs double their salary per annum; a little less for higher salary workers (they don’t use any more toilet paper than other workers, but tend to need specialized tools and environments to do their work, so it evens out). So, here’s a list of basic annual costs for a tech worker, with notes:
- Laptop ($1500 amortized over a 3 year life) - $500
- Monitor ($700 over 3 yr) - $233
- Office space - This is a little thornier; in SF it can be as much as $75/sq ft; in the midwest, more like $5/sq ft. $500/month for the space in a shared office seems reasonable – $6000
- Advertising, self-promotion, lead generation – $10000/yr (seems like a lot, but isn’t really)
- Health insurance – $600/mo*12 $7200/yr
- Internet (home/work) – $1200/yr
- Office furniture – (again amortized over 3 years; chairs, desk, lamp, etc; has to look good for client meetings): $2000
- Continuing education – Books, conferences, classes – $5000 (this is a low number; could easily double or triple)
- Phone (have to keep up with the joneses, and yes this is a business expense) – $1000
So, we’re already at $33,133. And we haven’t eaten anything for the year yet. You could cut some of these corners and maybe lose 20-30%, but just to push this above the poverty line, you have to make at least $60,000 in a year, in a place that’s fairly cheap to live. This is for a salary equivalent of $27k.
If we want to be a little more comfortable, a salary more in the $70k range would be good for someone in the midwest, in a decent sized city. Not “live in a fancy neighborhood with a family” nice, but suburbs with a family is maybe doable on that (don’t @ me, I know that’s not a lot of money for a family of four, but I know single moms that make a little less than that work). So that’s ~100k gross revenue with 2000 workable hours in a year (that’s 50 40 hour weeks and two for vacation) comes out to $50 per hour, right? Nope, because of utilization. In order to make $50/hr work, the contractor has to work all 2000 hours that year, which never happens. 50% of the time is a good ballpark number, although there are good years and bad years. Which brings us to $100/hr, which is still a really low rate, going from what I know people charge; there are a lot of other costs involved, and the market is pretty fierce. I know what I’d have to charge to make my salary and all those costs here in Oakland, and it’s more than double that.
There are other compounding factors; I haven’t mentioned the accounting and tax preparation overhead, in both time and money spent. Nor have I mentioned the business development aspects that can’t be neglected if you want to stay in business for more than a little bit. There’s also the opportunity cost of doing business in a place that’s not a big market for your skills; you can end up spending a lot on travel and expenses just to land clients that way (which is why the 10k number up there might be wildly low; also none of that is billable). Sometimes, clients just don’t pay after work has been delivered; that’s also a cost of doing business, and going after them costs more.
That’s not to say that it’s not doable. Many people enjoy the freelance hustle and flow. I’ve considered it myself, sometimes. But then I start to do some accounting like the above, and decide a salary isn’t so bad.