Part 2: Contract Compensation

In Part 1, I discussed two types of contracts that you will work with as a freelancer. Part of a contract is compensation – how much and when you are compensated for work completed.

I won’t discuss how much as that could be construed as price fixing, however, I will say that I have seen everything from $13.00 per hour to more than $150.00 per hour. You are the only one that can determine what value you bring to the project and you must price that value according to what the market will bear. And as I mentioned in Part 1, whether it is a direct contract or subcontract will impact the pay rate.

That being said, let’s look at two kinds of compensation – W2 and 1099.

W2 compensation means federal and state income taxes, social security, and Medicare are deducted from your check, just like you were an employee. Depending how you set up the W2, local taxes may be deducted as well or you may be responsible for them. Most companies who offer W2 status do not include any HR type benefits. The upside to a W2 is you don’t have to worry about paying quarterly taxes; the company with whom you have the W2 pays those taxes for you.

If you choose 1099 compensation, then you are responsible for deducting FICA (social security and Medicare), federal, state, and local taxes from each check and you are responsible for paying quarterly taxes.

As a freelancer, you may be offered a fixed rate or an hourly rate. Let’s take a closer look at each.

For either type of contract work, you may be offered a fixed rate for the project. You will need to determine how that fixed rate is to be paid out. For many fixed rate contracts, the client pays 1/3 third up front at the beginning of a contract, then 1/3 at an agreed upon milestone, and the last 1/3 upon completion of the project. But, there are variations on a theme, such as ½ up front, ¼ at an agreed upon milestone, and ¼ upon completion of the project. Again, you need to negotiate the terms by which you will be compensated.

You may be offered an hourly rate, in which case you bill by the hour. Don’t be surprised though if a client asks you to break down that hour to the quarter hour for billing purposes.

Occasionally you may be offered a per day rate or half day rate.

The final thing you will need to determine with compensation is if you will invoice weekly, biweekly, or monthly. Just keep in mind that it is not unusual for invoice turnaround for direct contracts to be between 15 and 30 days and subcontracts to be between 30 and 45 days. What does this mean for you? If you submit an invoice for a direct contract on March 1 for work completed Feb 15 to 29, you should receive that compensation between March 15 and March 30. If you submit an invoice for a subcontract contract on March 1 for work completed Feb 15 to 29, you should receive that compensation between March 30 and April 15. Plan accordingly.

Whether you pursue direct contracts, subcontracts, or a combination, you have to evaluate the pros and cons for yourself as to what type of compensation is most comfortable for you.

Part 3 will discuss types of insurance you need to consider.