To Be or Not To Be an Independent Consultant?

  By Liz Steblay, PICA Chief Advocate


Being a self-employed consultant or “free agent” is certainly not for everyone. Sure, it sounds fabulous – be selective about which jobs you take, have flexibility over your schedule, escape office politics, make really good money – but it definitely has some downsides like erratic cash flow and continuous business development. After counseling countless people about this decision, I’ve created my list of Top Ten Things to Think About before taking the leap.

  1. Money management
    • Cash flow – This is probably the hardest part about being self-employed, especially if you are going to consult or work with large companies. Corporate payment terms are typically “net 45” regardless of the size of the invoice or supplier. This means that if you work 100 hours in April and bill for it on April 30th, you probably won’t see any cash until the middle of June. Also, as a consultant your cash flow is likely to be erratic, depending on the type of work, the duration of your projects, and your ability to get new projects. In my years as an independent consultant, my pre-tax income ranged from $5,000 to $28,000 a month.  You need to be able to pay your bills in good times and bad.  Do you have a safety net? 
    • Taxes – Being self-employed means making estimated tax payments four times a year. This means you have to (a) figure out how much tax to pay, (b) have fairly large amounts of money available to make the payments, and (c) remember to make the payments to avoid penalties. (My personal estimated tax payments ranged from $8,000 to $24,000 a quarter.) Also, depending on your overall income and tax planning, there is a chance that you will pay more tax by being self-employed since you will have to pay “self-employment tax”; this is the share of Medicare and Social Security tax that an employer usually pays on your behalf. (For 2019 self-employment tax is 15.3% on the first $132,900 of net income and then 2.9% on any additional net income.) At a minimum this is probably going to be an additional $10,000 in tax. That said, if you keep good financial records and contribute to a SEP-IRA or Solo 401(k) you are likely to pay less in tax when you are self-employed, but that topic is covered elsewhere on PICA’s website. The key point is that taxes are a real pain when you are self-employed; are you organized enough to deal with it four times a year?
    • Retirement – Although saving for retirement is actually a big tax benefit of being self-employed (covered elsewhere) having the money available to put into a SEP-IRA can be a challenge, given the problems with cash flow and taxes mentioned above.

      (Note: PICA offers help and tips on all these things, but I digress.)

  2. Dealing with uncertainty – Can you handle the stress of not knowing where your next project or client will come from? Depending on your area of expertise and price point, you may always have plenty of work or you may have to go a few months between projects. (See the point above about erratic cash flow!)

  3. Prior consulting experience – Just because you are really good at what you do doesn’t mean you’ll be a good consultant. A lot of consulting boils down to contracting effectively (clarifying scope and estimated time), managing expectations and being an exceptional listener. Have you ever worked as an internal consultant for a company or as an external consultant with a consulting firm? People who leave regular corporate jobs often have a harder time transitioning to life as an independent consultant than those who have prior consulting experience.

  4. Getting started
    • Cash flow (again) – Given that it is likely to be at least two months before you have any income (most likely longer) do you have the cash to make ends meet?  You have to give yourself some time to build momentum. I recommend estimating at least four months with no income, although obviously enough savings to last six months is better.
    • Mental outlook – Are you mentally prepared to start your own business? Are you feeling confident? If you’ve just been laid off from your “real job” that may be the best time or the worst time to strike out on your own. Being laid off with a severance package can help ease the “start-up cash flow crunch” or it can be demoralizing. It takes a lot of confidence and energy to successfully strike out on your own so be honest with yourself.

  5. Getting new projects – Business development is a common challenge for most independent consultants. One way to get over the psychological hurdle is to avoid calling it “sales”. I managed to do quite well for myself by constantly networking (which can indeed be hard if you’re working full time on a project). In my mind I’ve never done any “business development” but new clients and projects always seemed to come along. Things to think about: How healthy is your network?  Do you keep in touch with former colleagues, bosses or clients? Do you connect with people just to say hi or to share an article they might like, or do you only reach out to people when you need a favor or are looking for work?  Be honest with yourself; if it’s fairly easy for you to keep in touch with people you will have an easier time getting new projects. Are you comfortable reaching out to nearly everyone you know to tell them that you’re available or looking for project work?

  6. Supply and demand – What is the market like for your skill set? Is there a lot of demand for what you do on an interim basis? Is there a lot of supply (people) who do what you do as well as you do it? Is what you do something a company is likely to need an external consultant to help with? Two disparate examples:
    • Leadership alignment / strategic off-sites – Most companies can’t afford to have someone on staff to do this, or their existing staff doesn’t have the skills, bandwidth or right relationship with the executives. Consequently, there’s a fair amount of demand.
    • Coaching – There are literally thousands of coaches in any given metropolitan area. Will you be able to stand out? There may be too much supply for you to make a go of it.

  7. Marketability – Do clients, project managers or colleagues ask you work with them again on something else?  Were former bosses, colleagues or teammates disappointed to see you move on to a different department or project? These can be indicators of getting repeat business or referrals. In my first eight years as an independent consultant I bounced back and forth between 2 primary clients; they kept calling me back to help with something else. This helps to ease the pressure of constantly doing business development, networking, or “sales.”

  8. Benefits – With Obamacare and the health exchanges this is less of an obstacle than it used to be (although who knows what’s going to happen with this). Obviously if you have a spouse with company-sponsored health insurance it’s less of a consideration than if you have to pay for your own insurance. If you do have to pay for your own insurance, will you be able to afford it? Are higher deductibles and possibly reduced coverage a potential problem for you?  Another consideration is no paid time off – in fact, vacations are twice as expensive because you have to pay for the vacation and you have the opportunity cost of not working those days. (You need to factor these things into your billable rate.)

  9. Work ethic – Are you the type to stay up late or work on a weekend to get a job done, or are you more of a 9-to-5 person? It’s true that as an independent consultant your working hours are flexible but the hours can also be erratic and demanding; you are often a slave to the client’s timeline or deadline. The best consultants (the ones who get referrals and repeat business) do whatever it takes to get the job done and/or keep their word.

  10. Job fulfillment – Do you really like being part of team? Do you like mentoring others? Do you like seeing how your efforts play out over time? If any of these are true for you, a “real job” may be more fulfilling.

As with any career choice, there’s a lot to consider but with the move to independent consulting, there is a lot of risk too. If you are thinking about it, perhaps the most important thing to ask yourself is whether or not you are committed to this career choice, or is it something you are going to try until the right “real job” comes along?  If the former, you have just increased your odds of success! And of course, PICA is here to help.

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