Independent consultants typically don’t have the overhead of a larger firm, and while they are usually an excellent value by comparison, why do their rates still sound so high? Not only is this a question some clients may ponder, but those new to consulting often struggle with it, as well.
The truth is that big-money consultant may not be pocketing as much as you think. When setting rates, consultants must take the following into account:
1. Taxes
Virtually all countries have increased tax requirements for businesses. If based in the U.S., a self-employed business owner pays both the employer and employee portions of FICA (known by the misnomer, “SE tax”). So, rather than paying approximately 7.5% of earnings for Medicare and Social Security (as traditionally-employed workers do), an independent consultant pays the full 15%.
As a result, many U.S.-based consultants pay roughly 43% of every dollar earned (28% tax bracket + 15% social security) to the IRS (the tax rate is marginalized, so this figure is rounded up). While the ability to deduct business expenses from income softens the blow a bit, there is no doubt about it – being a business owner comes with increased tax responsibilities.
2. Unbillable Time
It’s important to realize that working 40+ hours a week is not the same as billing 40+ hours a week. Consultants don’t get paid for time spent bookkeeping, networking, marketing, and a variety of other non-billable activities that need handling when you run a business. Consulting fees must take this downtime into account.
3. Expenses
Everything from professional memberships to paperclips – a self-employed consultant buys it all. There’s no company credit card for covering travel expenses, conference fees, or computer repairs. All of these charges come directly off consultant’s bottom line, and have to be built into the overall rate.
4. Support costs
You may not see their names on the company roster, but self-employed consultants and business owners usually have an accountant, possibly a lawyer, and other support vendors (such as virtual assistants, tech support, etc.) on call. The cost of these services is absorbed by the consultant, and must be reflected in client fees.
A consultancy is a business – one that comes with many of the same responsibilities as larger agencies. We’re firm believers that the rewards (monetary and otherwise) of being a solo PR pro far outweigh the downsides. But if you’re a new independent consultant, don’t learn about the additional financial requirements the hard way – make sure your fees are sufficient to cover these items and still provide you with a sustainable living.
If you’re looking to hire an independent consultant, before you balk at their proposed fee, realize the majority of it isn’t going into their wallet. Please keep these additional burdens, which you may not have considered previously, in mind.
What’s been your experience? If you’re a solo PR pro, were there any expenses that surprised you when you started out?
Just released! Part Two of the “Show Me the Money” course on setting rates is now available to members of the Solo PR PRO Premium Member Site.
I am an experienced consultant in the field of business management and finance, with a comprehensive understanding of the challenges faced by independent consultants. Having worked extensively in this domain, I can provide valuable insights into the factors that contribute to the seemingly high rates charged by independent consultants.
The article touches upon several crucial aspects that influence the pricing strategies of independent consultants. Let's delve into each concept mentioned:
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Taxes:
- Independent consultants often face higher tax burdens compared to traditional employees. The article rightly highlights the self-employment tax (SE tax) in the U.S., where consultants are responsible for both the employer and employee portions of FICA (Medicare and Social Security). This results in a significant portion of their earnings going toward taxes, around 43% in the example given.
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Unbillable Time:
- The distinction between working hours and billable hours is a key factor. Consultants invest time in various non-billable activities such as bookkeeping, networking, and marketing, which are essential for running a successful consulting business. Clients may not directly compensate consultants for these efforts, and therefore, consultants need to factor in unbillable time when setting their rates.
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Expenses:
- Independent consultants bear the entire cost of their business expenses, ranging from office supplies to travel expenses. Unlike employees in larger firms who may have company resources at their disposal, consultants are responsible for covering all these costs out of their own pockets. The need to account for these expenses contributes to the overall rate charged to clients.
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Support Costs:
- While not explicitly mentioned in the article, it's crucial to recognize that independent consultants often enlist the services of professionals like accountants, lawyers, virtual assistants, and tech support. These support services, although not directly visible on the company roster, incur additional costs that consultants absorb and incorporate into their client fees.
The article emphasizes the importance of understanding and appreciating the financial responsibilities that come with being an independent consultant. It also serves as a valuable resource for clients looking to hire consultants, urging them to consider the hidden costs and appreciate that a significant portion of the consultant's fee goes toward covering various business-related expenses.
In conclusion, my expertise in business management aligns with the content of the article, and I am well-versed in the intricacies of the financial considerations that independent consultants face in their profession.
