Main image of article Want to Become a Tech Consultant? Read This First.

Summary

There are many reasons why a tech pro would choose to become a consultant. Some opt for that path after losing a full-time position, while others seek out the flexibility that comes with spinning up a consultancy. Still others see consulting as a way to profit wildly off their highly specialized skills.

Whatever their path to consulting, tech pros can’t just flip a switch and expect to seamlessly transition into this new role. Instead, there are numerous factors to consider. Let’s break those down—and you can decide whether consulting is something you truly want to do.

Almost everybody who starts out on their own is surprised the following April when they discover they owe much more than they had expected to. When you’re employed with a fixed salary, it’s easy enough to set your exemptions correctly and make sure your employer takes out pretty close to the right amount of money each paycheck. But working on your own, there are multiple factors.

The tax tables are a bit confusing at first, but fortunately you’ll be able to figure them out without too much trouble (and take the time to do so—you’ll be glad you did!).

Next: You’re supposed to pay quarterly estimated taxes, but how do you know exactly how much you’ll make? You don’t; however, you can estimate how much you’ve made so far, and go with that each quarter, while putting away a little extra the latter half of the year, just in case you make more than you thought you would.

And finally, there’s a big gotcha that hits contractors come April 15: self-employment rax.

In simplest terms, self-employment tax is what you’re paying for social security and Medicare. Normally when you’re employed, you only pay half of this, and your employer pays the other half. In 2024, the rate was 15.3 percent, meaning you paid 7.65 percent if you were employed. But when you’re self-employed, you pay the entire thing. This is in addition to the regular payroll taxes. When people talk about the different tax brackets, they’re not including that whopping 15.3 percent.

What that means is it’s too easy to severely underestimate how much you’ll owe, and come April discover that you owe an additional $15,300 on top of the regular taxes (assuming you made $100,000 the previous year). That’s enough to destroy your small business and push you back to regular employment.

Take time to truly understand your taxes. Don’t just assume a basic rate, such as 25 percent and set that aside. Every month, try to project how much you’ll make by the end of the year, and set aside the money accordingly, including the 15.3 percent. It’s no fun having to set up a payment plan with the IRS. And keep records so you can deduct everything possible. (But realistically, self-employed software developers and techies usually don’t have a lot they can deduct, unfortunately.)

When you work for somebody else and you’re a salaried employee, you typically work 40 hours per week, unless you’re at a startup or fast-paced company that demands 60 or 70 or even 80 hours.

When you’re consulting, your clients only want to pay you for the actual time you’re focusing on their work. But you’ll also need to devote hours to administrative tasks, spend time hustling up new clients, and actually taking a break once in a while. Depending on your number of clients and your preferences, you could spend way more than 40 hours per week keeping everything running.

Clients don’t want to just see a bill for, say, 35 hours. They want to know what you did during that time. Our experience is that this doesn’t have to have excruciating detail. Instead, just list brief descriptions. And round them to either the nearest 10 minutes or the nearest 15 minutes. For example:

10:00am - 10:45am: Zoom meeting with client

11am - 12:15pm: Coding time

12:15pm - 12:45pm: Documentation

Then simply tally it all up. Use a spreadsheet at the very least; you’ll probably want to invest in some invoicing software that lets you enter your time in detail, and that calculates the totals for you. (If you do things manually, you’ll be doing a lot of time adding each week, and it’s too easy to make a mistake.)

Most of us who have consulted learned this one the hard way. There’s occasionally the client who suddenly has cash-flow problems and can’t pay you for another three or four weeks. Or they suddenly ask you to cut your hours way back. That’s why you want to have at least two clients going at any given time—if one gives you trouble, you can count on the other to pay you and keep you afloat.

And remember, these people are your clients, not your employers. They’re under zero obligation to give you loads of hours.

If you have a spouse who has a job and a good health plan, great! But for many of us who are single, we don’t have that luxury. We need to buy our own health insurance, typically through the ACA Exchange.

This alone can impact your timing on when to leave your day job and start consulting full time. The Exchange has strict rules on when you can sign up for a health plan; normally, open enrollment starts in early November of each year, and the plan begins January 1. So, if you currently have a job and are planning to break away, you might consider doing so the first of next year.

Another option is COBRA, where you continue paying the monthly premium on your previous job. However, COBRA isn’t forever; you can continue coverage through it for up to a year and a half. It also tends to be expensive.

As we covered recently, make sure to set your rate well. Remember, you’re a business, not just an individual employee. But another thing to consider is that you most likely won’t be working a full 40 hours per week, as we mentioned already. If you’re excited to charge, say, $50 per hour, thinking that will roughly equate to $100,000 per year, think again. If you only end up billing only 30 to 35 hours per week, and want to take two weeks off during the year, suddenly that final annual number goes down to around $80,000 per year or so. That’s a pretty substantial difference, which is why the rate you choose is an important business decision.

Most clients view you as temporary help. They have no plans to keep you on full-time for years to come—if they did, they would want to actually hire you as an employee. Here’s the bottom line of the consulting life: work just dries up.

For example, let’s say you’ve finished building version 1 of the product, and while there was lots of fun talk about features for future versions, suddenly the client is happy with version 1 and just doesn’t assign you new work.

They might call you in a year if they decide to start in on a new version, but for now, they’re good to go. And you’re suddenly without an income.

The proper way to handle this is twofold: first, have multiple clients if you can. Second, make sure you have the funds to handle these gaps of zero work. And spend those “gap times” doing everything you can to grow the business, whether that’s networking or marketing.  

This one surprises a lot of people: Clients like to see screens and web pages, and they equate that to progress on your end.

There are different approaches to building software, but one common approach is to start with the model. You model the data, build the SQL tables, and build the back-end classes that match the tables. It’s exciting work, except for one big problem: There’s no GUI to show the client.

People who don’t build software think that the front end is 99.9999 percent of the work. They look at it in terms of screens or pages, and they think that over time the software will “grow” from 0 screens or pages to a dozen or more. Unfortunately, they’re completely wrong, but it’s nearly impossible to tell them otherwise. We can say things like, “You can’t paint the car until after you’ve built the engine,” but they rarely seem to get it.

While you might spend the first three months modeling the data and building the backend and developing the API, the client won’t see that as an actual accomplishment. They want to “see what you have so far.”

This might sound utterly bizarre, but believe us, most consultants have encountered this: the look of dismay on the client’s face as you proudly explain all your data tables and their well-normalized relationships and foreign keys. For us developers, that is exciting. For the businessperson with little tech experience, not so much.

In that spirit, we recommend that you at least get some mockups going, and a couple screens (for desktop apps) and pages (for web apps), even if they’re just temporary. The client will be happy, at least.

For your first year, you’re probably pretty safe not separating business from personal finances. Yes, this goes against typical advice. In reality, you’ll most likely have just one or two clients, and they pay you once a month. And come tax time, you’ll have a few deductions (like the new computer you bought), but not a lot. You’ll fill out a Schedule C, which is for your business, but it’s tied to your personal income and the IRS isn’t forcing you to keep a separate bank account. So for the first year, you might not need a registered business name or a business bank account.

But plan on doing so the second year once things start to take off.

And there is one exception: If you manage to land a large corporate client, you might need to register as a vendor under an LLC. But even then, an LLC is a “pass through” entity, meaning the income still goes on your own personal taxes. And you might still not need a separate business bank account.

Now having said all that: keep careful records. That means a spreadsheet listing your expenses, mainly so that, come tax time, you won’t have to spend days upon days going through old receipts and trying to find the totals. And in the unlikely event you get audited by the IRS, you’ll have all your records nice and neat.

Every situation is different, but most successful consultants will agree about the essentials you need to get started. Taxes are probably the single biggest “Gotcha!”, so treat the first year as a learning experience. Save your money so you’re ready for the tax shock, and then you’ll have a good idea how much to put away each month and how much to pay quarterly.