Ask HN: Contracting without an agency

https://news.ycombinator.com/item?id=7965512

by chrisbennet • 12 years ago

10 6 12 years ago

news.ycombinator.com

Background: In the US, an independent contractor/consultant can not work directly for a company like an employee. This was in response to some companies (Microsoft) classifying employees as contractors to avoid paying benefits, etc. However, a job shop/outsourcing agency can rent you to a company on a long term basis. One agency that I worked for payed me $65/hr and charged the client $130/hr.

I've contracted and had my own clients but the IRS rules* limit my flexibility. I.e. going to a clients site and getting guidance and then working offsite is fine but if I want the ability to work on site day after day without getting my clients or myself in trouble with the IRS I can't as an independent contractor.

What are my options for performing the agency role and capturing that value myself? Can I somehow be my own agency?

* IRS "20 Questions" a a guideline for determining if you are an independent contractor or not.

tptacek• 12 years ago

No, that's not true.

What is true is that large companies will (a) ask one-person consulting shops to subcontract through existing contracting firms, because they have very complicated MSAs and accounting processes set up with those larger firms, and (b) occasionally try to withhold taxes for one-person contracting firms.

These are sales/marketing issues, not legal issues. There's no formalism to consulting "agencies". Basically: if you're talking to a BigCo who wants you to work as a sub through one of their vendors, that's a sales objection. If you're doing commodity consulting work, like the same front-end web software development work that their vendors already sell them, you're going to have a hard time displacing the vendor, because doing that costs them money and incurs risk.

Three responses to that trap:

* Specialize further, so that the work you do isn't substitutable by work they can buy from one of their big vendors. Note that you will not have an easy time trying to specialize in technology (being the best Angular.js developer in the world does not make it easier for you to sell web front-end work against a huge vendor that already provides that); you need to find ways to specialize in business model and problem domain.

* Pick more appropriate clients. This sounds flippant, but it's not; it's one of the core problems of sales. If you're running into potential clients that all want you to sub, you need to do a better job of qualifying your leads so you don't waste time on prospects who aren't going to sign an MSA for you.

* Grow. BigCos can ask a single-person shop to sub through an existing vendor, but they can't reasonably ask a 10-person shop to do the same thing, because no 10-person shop would ever do that.

patio11• 12 years ago

This is not as big a problem as you believe it to be. The independent contractor test is a balancing act. It is not an absolute barrier to you personally working on behalf of a particular client.

Kalzumeus Software maintains a fact sheet, because that sounds better with "Word document". It's one page and starts with the words "Patrick McKenzie is, under relevant IRS regulations, an independent contractor and not an employee of your company." It then has a bunch of bullet points where I recite the facts which are most supportive of that conclusion.

This has resolved 95% of interactions I've ever had about this question. (The last 5% was at a particular BigCo where they wanted me to fill out a BigCo-approved questionnaire, but they reached the same conclusion.)

I second Thomas' comment that this is largely a sales question rather than a legal question. At a lot of places, "I want an agency in front of you" just means "I want someone to yell at if you turn out to be a bozo." An agency is one way to decrease the downside risk of you being a bozo. Or you could just have a bunch of strong signals which say "Almost certainly not a bozo." If a potential client said "Patrick, we want to work with you, but we'd rather do it through an agency." I'd say "Can I ask what is motivating your desire to do it through an agency? I might have a solution for you."

chrisbennet2• 12 years ago

Thanks for your help guys!

lifeisstillgood• 12 years ago

This is an exact analogue for the UK's IR35 rules. It is designed like the US to protect workers being exploited. Note that it is not entirely designed to prevent tax avoidance - someone pays my National Insurance (think benefits) - either my "employer" or my own company.

Now I am a middle aged, middle class skilled software professional with 20 years experience. Exploiting me is qualitivly different to exploiting a single mother on a zero hours contract at the local factory. And HMRC knows this - and has better things to do with their time.

This is not to say that my contracts are shams or that the basic principles of independence and substitution are not there - but that we are all big boys - exploiting 500/day software developers is like raping a hippo - difficult, noisy and leaves no-one satisfied.

I would focus on an aspect of the 20 questions like "substitution". Under IR35 the contracting company must have the right to swap out a person doing the job - that is if Mikado Software wants to send Bob in to do just as professional a job as me, then the contract jus allow this and the "employer" can't refuse. A friend and I used to promise to act as swap partners to make this happen (he is now following his startup dreams at Nujobs.co.uk)

This is I have found the simplest and best way to say to a client "you are buying services from a company, not just me". It is something I do rarely obviously but with lead time and explanation everyone sees it as a tough but necessary thing to do - IR35 rules don't you know !

Your ability to perform the agency role is as others say a sales function (these guys spend all day everyday cold calling - the bad ones do at least)

But your ability to substitute other developers in for yourself is the key - if you are doing well for a client and they have more work then you are in a great position to "bring in this great developer I know" to help - and suddenly you are not running a single person contractor anymore but a digital agency. This is a lot of work and stress so think carefully - and as a rule of thumb you will need to hire out 8 employees to start making more take home than you do now.

So if you focus on something like substitution, and get the idea you are a company not a hire into the minds of your "employer", and if you build up a marketing presence as a "agency focused on xxx" and if you want to run an Dev shop, then you will find a client who wants to hire a shop for a actual project not just bums on seats.

But I would warn you Brennan Dunn (bdunn on HN) is clear eyed on the costs and stress of running a profitable shop - and that only when you have grown to 8 or so people will you start to see an easier road than just being a bum on a seat.

In short, don't worry about someone capturing the "contractor surplus" - 20% is about average and it's dropping. The guys who who raking in 50% were exploiting you - are you still workin there? See ?

Focus on upping your daily rate for a year whilst building an expertise and audience in a certain fun niche. After this I suggest you may well be in a better position to decide how to jump. If you aren't on 100/hr find a contract where you are. If you are on 100/hr move up to 120. Keep doing this for six months - I was made redundant in 2008 and it took 8 months of hustling every lunchtime to move three contracts and hit 120k/pa (about 200USD). It's doable.

scottru• 12 years ago

These are excellent responses as usual, and I'm coming to this a few days late, but I wanted to add another answer for someone who maybe isn't willing to bite off quite as much sales skills as tptacek and patio11 are suggesting, or are dealing with a buyer who doesn't have the authority to go against the agency rule - i.e. the dev manager wants to bring you in, but he has no idea who he has to talk with to get you on board as an independent contractor, and you're not on an approved list, and two people tell him that he can't do it, and three months are going to go by and meanwhile everyone is frustrated, including you, who wants to work.

This is a common, real-world scenario, and we see it all the time. Agencies, in fact, are used to it: it's called payrolling.

If you find the work yourself - i.e. someone wants to hire _you_ but needs you to go through an agency - then ask for the names of three agencies they work with, and if any of them payroll. (They may not know the answer to that.)

Then call all three, tell them the hiring manager and anything else you know about the financials (you might know bill rate, or what you want to make, or both), and tell them you're calling all three agencies, and you'll go with the one that can make the best deal. That's a win for the agency (a little money and another person on the books with that client) and a win for you (in comparison to the $65/$130 deal). Factoring in things like employment taxes and such, you can assume that you'll keep ~90% of the bill rate. (So $65 would become $117 total comp: if they're required to employ you and pay taxes, offer insurance, etc., more like $95 to you. Look, almost a 50% raise.)

We're a small agency (~50 engineers), and we usually have 3-5 people we're payrolling because either the client called us and asked us to payroll, or we got a call like the one above and decided it was worth it.

chrisbennet2• 12 years ago

OP here. That's excellent, helpful advice. Thanks.

Ask HN: Contracting without an agency

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