Disclaimer: I am not an attorney, tax advisor or small/large business expert. Everything I write here is my personal opinion so take it with a grain of salt. I am not affiliated with any vendor so any product I mention is just for example purposes, I don't recommend any products or services. 

Yesterday, I wrote about how to estimate your utilization when you are planning to become an independent consultant. Today, I am going to give some pointers about estimating your expenses. Once you know your expenses, you can calculate the amount of money you have to make to justify quitting full time job. I used the following formula:

My income as an employee + my expenses as an independent consultant = money I have to make to justify quitting my job

How do you estimate your expenses? Consider the following expenses:

• Accountant's fee every year
• Government fees (for example, Illinois has yearly fee to run an LLC)
• Business supplies - I only considered supplies I would need for business. For example, cost of printing business cards counts but cost of printer cartridge doesn't because I would buy printer cartridge even if I didn't have a business
• Business insurances - there could be a separate blog entry about insurance but if you own a business, you would at least need general liability insurance, professional liability insurance (some clients require it), worker's compensation (if you are going to have employees) and its variants
• Personal insurances - health, life, short term and/or long term disability. I did pay for some of these insurances as an employee as well so I only calculated the difference
• Self employment tax - if you start an LLC, you will be paying so called self employment taxes. It is 15.3% on the first $90,000 you make every year. As an employee, you pay half of it and your employer pays the other half. As a self employed, you pay both the halves
• Any professional memberships or subscriptions you might need
• Any other cost you might incur as a result of quitting your job (e.g. forced to buy a second car, move to a more expensive location)
• Cost of lost benefits such as 401k match, paid vacation and more - this is an expense because now you will have to pay for these out of your own pocket
• One time expenses or startup expenses: I didn't pay much attention to startup expenses because they incur only once and I didn't want to factor them into my billing rate but here are some startup expenses you might want to consider:
• LLC articles of organization filing fee
• Laptop and related accessories such as internet security software, hardware locks etc.
• Bank account fee
• Attorney fee if you need advice on what type of company to form
• Software such as Quick Books to maintain your books

I am intentionally not putting any numbers against any of these expenses. You need to do a lot of research to estimate them. Don't take others' expenses and assume that you will incur the same amount.

Disclaimer: I am not an attorney, tax advisor or small/large business expert. Everything I write here is my personal opinion so take it with a grain of salt. I am not affiliated with any vendor so any product I mention is just for example purposes, I don't recommend any products or services. 

I want to go independent but how much should I charge? Every consultant thought about this or similar question sometime in his or her life - most likely while considering consulting as a career. Some consultants recommend doubling or even tripling your current rate as an employee while others determine billing rate by dividing desired income by number of hours you expect to work. In any case, you have to know the number of hours you expect to work (called utilization) and amount of money you want to (or have to) make.

How to determine number of billable hours per year? You have to use your judgment to answer this question but use the following data points:

• If you put your resume on monster.com or similar and get a lot of phone calls and emails, it means your skills are in demand and the market is good; you shouldn't have any problems finding projects throughout the year. When I started, I used to get at least 3-5 emails a day and a phone call a day so I knew that there were a lot of jobs out there for me. Be careful though. A lot of 'opportunities' will simply not match your skill set and interest
• Look at your vacation plans. If you have to take vacation during certain time of the year, you have less flexibility. You will not be working while on vacation and on top of that you may loose time between the projects. Try to use time between the projects as vacation
• Consider your location. If you are located in a big city, chances are there is a lot of work for you
• The length of your contract will also impact the number of hours you will work in a year. My first contract was 8 months long so I knew that during the year, I would be between projects only once and I could estimate higher utilization
• Finally, consider public holidays and emergency situations. Companies have 8-11 holidays in a given year, which means a loss of 64 - 88 hours per year for you. Add to that the hours you would loose due to unforeseen circumstances. Remember, you can't call in sick without loosing money!

When I was considering going independent, I estimated that I would work between 1600 and 1800 hours per year. I adjusted that number to 1800 hours/year when I got my first 8 months long contract and I didn't have any major vacation planned.

Tomorrow, I will talk about estimating the income...