From Employee to Consultant: 3 Things to Consider Before Making the Switch

by Loni Klara

5 min read

    “For me, it was like jumping off a cliff.”

    This is a sentiment echoed by many consultants who strike out on their own, and Christian Michael is no exception. A philanthropic consultant, Christian spent 15 years honing his expertise before establishing a sole proprietorship with private clients including Capital One and the S. D. Bechtel, Jr. Foundation.

    Christian’s journey to entrepreneurship follows an increasingly popular trend where subject-matter experts hone their craft, then set out on their own, often consulting for their former employers. It’s a way to scratch the entrepreneurial itch without taking on high risk or venture funding.

    “I’m a pretty practical person,” says Christian. “Having a paycheck that comes in regularly and knowing where I’m going everyday gives me a sense of security,” he says. “It was something that I didn’t necessarily want to give up.”

    He made a plan, put good processes in place and now enjoys a comfortable balance of risk and security. Still, being on your own comes with its challenges. Christian provided insight on three important lessons he’s learned in his first year of business.

    Decide How You’ll Pay Yourself

    Giving up a steady paycheck is intimidating. Regardless of how strong your career skills are, every business owner has to embrace some level of uncertainty. It can be difficult to predict how many new clients you can bring on board and exactly how much and when they’ll pay you. Then you have to factor in expenses like home office equipment, software and insurance. Independent consultants need to get comfortable with the difference between gross revenue and net pay.

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    Deciding how much and when to pay yourself will definitely help the transition from W2 employee to 1099 consultant. “Before I made the decision, I thought about what my W2 income looked like then added up the cost of the benefits my employer provided. If I were to not have insurance and I needed to go into Covered California, what was my premium going to be? I was totally shocked how expensive it was,” Christian explains.

    To account for the increased expenses, Christian created a business checking account. Every two weeks, he pays himself a conservative salary from that account and leaves room for estimated tax payments and unexpected expenses. At the end of his first year, he gave himself a “bonus” with the money he’d accrued in his business account.

    “Before you start,” Christian says, “talk to somebody who’s been doing this for a while.”

    Productivity Will Pay Your Bills

    When you’re working on your own, your productivity is directly responsible for your paycheck. One trick Christian uses is VIP email addresses for his top clients so that he can respond as quickly as possible.

    This is the kind of thing that can make running your own business stressful at times. “A lot of people say that I’m setting the expectation that I’m always available. But quite honestly, if that means keeping my contracts and clients happy, then I’m all for it. If it means that I’m walking down the street pushing the stroller and I just need to respond and say, hey I got your email, I’m on this, I’ll do that.”

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    Administrative tasks like accounting creep into billable time as well. Christian started by keeping track of his income and expenses in Excel. Time spent on non-client work doesn’t earn revenue and detracts from time with his family. Making the jump to QuickBooks cut down on the time he had to spend updated spreadsheets.

    The flip side of the increased overhead is control over his own schedule. When his son was born, he gave himself a generous paternity leave. Nowadays, he can take breaks to be his son during the day or answer a few emails once his newborn is asleep. The flexibility is worth the extra effort required to keep his business running smoothly.

    You Will Be Your Own HR Department

    “Should I work from home or rent an office space?”

    “Should I hire an employee to help manage clients?”

    These are the kind of questions Christian finds himself mulling over. “I could afford to bring on a full-time project manager or assistant. What I’ve done in the past is bring them on as contract employees, but that’s difficult to do because you find people that are balancing a full-time job and helping you out on the side.”

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    These are big decisions for a small business. Even if it makes sense financially, scaling from a one-person operation to one that hires is significant change. It can have a big effect on the lifestyle that many consultants seek. “It’s not the financial part of it,” says Christian. “It’s more just the HR side of it. Is it going to be worth my time managing that person?”

    Workplace environment is another consideration. Having a baby at home means that Christian can enjoy spending more time with his family, but it’s also necessary to find a quiet space to work and lead webinars, something he often does for his clients..

    “I’ve looked at shared office spaces, but I’m not sure that’s worth the expense either,” he says. “The whole reason for getting an office is because I need privacy. So, do I spend the money to get a private office, or do I find a place where I can rent by the day as I need, even though it’s more expensive?”

    He runs decisions like this through his accountant, who helps him calculate the changes to his tax liability based on large expenses.

    One Step at a Time

    One of the great benefits of working for yourself is the ability to take on more or less work, hire or not hire, keep a home office or rent an office—it’s all up to you. Christian is taking it one step at a time to ensure that he maintains the balance he originally sought. If the time comes to scale the business, he’ll have the opportunity to do due diligence like he did when he left his full-time job.

    Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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