How to set your billing rate: estimating expenses

Written by Chintan Rajyaguru

Wednesday, 04 October 2006 16:17

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.

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