Why do consultants or contractors make more money than employees?
The benefits and taxes thing, in my opinion is the biggie. Most people don't realize that the cost to the company for a full-time employee with benefits can be 2x or even 3x the amount they see in their paycheck.  Health plans are extremely expensive. Even if you are having money taken from your check for health insurance, it is often just a fraction of the total cost, and the employer is subsidizing the rest.  More expensive benefits that contractors don't typically get are 401K matches and paid vacation days. When contractors call in sick or don't work because it is a national holiday, they don't get paid for that day. Also, see that line on your paycheck deducting for Social security and Medicare? That is only half of the tax. The employer pays an equal amount that is not shown on that statement. Also, they pay taxes that go towards unemployment benefits , and may be required to pay higher taxes if they churn through a lot of full-time employees. You can usually let contractors go with relative impunity . For the unemployment tax reasons, not paying for people's days off or benefits, a lot less paperwork, and less risk to the business associated with committing to full-time employees all provide value to the company. Thus companies are willing to pay more because they are getting more.  Think of it like a cell phone-contract. If you commit to a three year contract it can be a pain/expensive to get out of the deal early, but you will probably get a better rate in exchange for the risk being shifted to your end of the deal. There are a couple of reasons, including: All the existing answers are right and the general theme is: contracting is a different kind of relationship. It's a business-to-business relationship rather than a business-to-employee relationship. This has implications such as: Of course, some contractors are effectively just over-paid employees, and some of the above points don't apply to them, but that's the idea behind bona fide contracting. In addition to the other answers, consultants and contractors face a real risk (though admittedly small) of not getting paid. The more short-term the gigs are, the higher the risk of not getting paid for a particular job. As an employee, there are laws to ensure that you get your paycheck. As a contractor, you're just another creditor. I know a couple of contractors (software engineers) who have had difficulty collecting after a job. (I'm not even sure one ever got paid the full amount.) I also personally witnessed a contractor show up for a job who was then told by the company that they unilaterally decided that they would pay half of their pre-arranged rate. "The ""more money"" aspect is only true if you ignore the lack of symmetry between employment and contracting. Consulting is another story altogether.  Companies are willing to pay consultants for a number of reasons but the most important is deniability.  If a decision is recommended and goes wrong then the consultants can be sued.  Liability cover is expensive. Cynicism aside, it often isn't cost-effective to keep specialists permanently on the payroll for tasks that are performed once a year. Recently I've noticed that the nature of consulting is changing.  Companies are starting to assemble brains-trusts of internal consultants who can create and manage projects while outsourcing only the labour-intensive data-collection roles.   Expect this to have a big impact on the management consulting industry." Note too that being a contractor means that you will unavoidably have periods between contracts; you tend to be out of work more often than a salaried employee would. You need to set your rates so your average income, including those down times, adds up to a living wage including all those benefits that aren't being covered. If a company hires a contractor, they understand that this is part of the trade-off. They avoid making a long-term commitment when they don't have a long-term need, and they accept that this convenience may cost a bit more in the short term. Contractors earn less. Especially the people that are hired under them. They usually have no education, and base pay; long hours and hard work.
"Comission is a must when doing sales. That is the best (and only good) incentive to sell more. How much you want to give all depends on margins, the salary level that is accepted in your state/country and what sellers you have (young or old).  Salary costs at 30 - 35% of total order value is normal including salary tax and all tax oriented costs around that employee.   There are 2 ways of doing it. Only high commission and fixed salary + lower commission. Even if you use fixed salary + commission you can have ""restrictions"" so they have to sell above a certain level to get that commission. That means that you don't take any risks.   An example of a salary model that I found was popular. (The numbers are just made up according to what is normal to have in Sweden). It's a step-model. If you sell for:  Step 1: 0 - $3000 you get high commission 20% of everything you sell  Step 2: $3000 - $4000 you get fixed salary of $1000 + 10% commission  Step 3: $4000 - $6000 you get fixed salary of $1700 + 15% commission  And so on.  Your weakest points are when going to a higher step. You have to change the steps so it works with your salary statistics so you have most people under a step to motivate them to go to the next instead of having them exactly above one step. As you can see, with a step model, you just put a disquise on the commission model but make it more attractive. What the seller think is that they have a fixed salary. If a seller is happy, he/she is selling a lot.    I have also had a criteria saying that if you can keep youself at 1 step for more than 3 months you will start there each month. Then it's up to the team leader to warn if that seller IS good or just LUCKY." "Says who? Or is this just something you *think* makes sense, because on first glance it does. Many studies show privatizing basic government functions like waste removal, prisons etc. to contractors ends up costing the government more.  Recent study that shows that its more expensive: http://www.nytimes.com/2011/09/13/us/13contractor.html  Specifically on government military private contractors, via this link, bottom of the page: http://www.pbs.org/wgbh/pages/frontline/shows/warriors/contractors/ceff.html  Steven Schooner  Professor, The George Washington University Law School; expert on government contracting  ""I don't think there's any question that no one knows whether it's cheaper or not. One of the best studies we've seen on whether outsourcing saves money is the RAND study, which is now a few years old. And what the RAND study says is there's the potential for immense cost-saving in outsourcing. But it hasn't been proven yet.  There's a number of episodic studies since, but there has not been a compelling case made that government outsourcing, particularly this type of outsourcing, saves money.""  Full interview: http://www.pbs.org/wgbh/pages/frontline/shows/warriors/interviews/schooner.html  He makes your point however that the savings is thought to come from savings in paying someone before and keeping them on payroll when we're not in a military activity that requires their services. No pension after, no payroll before. Thus the increase in compensation is a lot higher. However it doesn't mean its conclusive to show that it *does*save money." &gt; A lot of contract positions have become less or equal pay than the permanent workers.      That many be true in many industries, but not in IT.   Technology contractors typically make far more than employees.   The example in the article was someone working for IBM.   IBM is a low paying IT contractor, and still pays more than $50 per hour for legally resident contractors (H1B's is a completely different story). "You have to be firm. Refuse to work excessive overtime. This is why I switched to consulting. 16 hour days suck, but if you're billing for 16 hours, it makes it more bearable.   I've recently switched to the ""I only care about money"" mode of thinking, and switched to hourly pay after being salaried for almost 10 years. And it's not that it's the only thing that matters, but a lot of the rest of this stuff falls into place. It really simplifies things. You don't work for free. Your time is seen as a commodity. You are given goals and targets. You're not dragged into unnecessary meetings. Your opinion is respected. If you have to work saturday, you're sure as hell billing for it. If I take off at 2pm because I want to watch a hockey game, I just stop billing at 2 and there isn't this ""I'm not getting my money's worth!"" feeling from the manager." "Or doing work, that has value, but with an experienced employee looking over their shoulder for more total time than it would take said employee to just do the work him/herself. In which case they're learning something, and ""doing work that has value"", but at the cost of a similar amount of value from elsewhere.  That's pretty extreme, though, and at least in a field like programming where the pros get paid quite a bit...so say it takes the pro 10hrs to do something, and it takes the intern 40hrs and 5hrs of help to do the same thing. But if the pro gets paid $80/hr, and the intern only gets paid $10...haha that works out perfectly. Even if it hadn't the point stands—the intern can get paid something as long as they're doing _some_ useful work, even if it takes them an exorbitant amount of time to do it. If they actually need as much help as it would take the pro to just do it...consider another field, dude." Because many companies are not willing to pay more to attract those employees. They figure fuck it, the government says I can pay this little. I am. In fact, many wait jobs are paid the 2.50$ min because tips. So employers can make as much as possible. This is exactly how I feel. I've been doing contract design for the last 5 years. I've made an OK salary, not quite as much as I could in the corporate world. But I don't have any one to answer to but myself, which means more to me than the extra money I could be making. Running a sandwich shop and, say, a software consulting service are quite different things.  I had two employees at one point, following the kind of thinking in the article.  But I found what that meant was that I had to spend more time being a manager and salesperson and much less time doing the work I enjoyed.  To make it viable I would have had to scale up to the point where I had at least one salesperson and maybe a manager, which would have required more income-producing staff to support them.  Instead, I scaled back to just myself, and have been very happy with that decision.  The article also underestimates what can be made in consulting or IT contracting.  Rates well above $100/hr are common for people with expertise (as opposed to commodity providers), and billing at least 40 hours a week is not usually a problem.  It's certainly true that a one-man operation is much more likely to put a ceiling on your earnings, but (a) that ceiling can be a lot higher than the article suggests, and (b) depending on the business, breaking that ceiling and earning much more is certainly possible in some businesses, for example where you have the opportunity to sell your work in product form rather than hourly. sure, and I'm happy they're getting paid more... this is important work. people shouldn't have to scrape by just because it's not the most desirable career.   but saying that increase in cost won't affect an increase in price and that average people will be better able to afford higher construction costs is misleading.   just because construction workers have more money in their pockets, doesn't mean the average person will have more as well. "But you're forgetting that the problem under discussion here is that the owners who set the wages tend to prefer higher profits over ""best employees, they are happier, lower turn over"". In a lot of industries that employ a lot of people, a marginal increase in productivity isn't going to overcome the increase in wages required to create it." But there's a difference freelancing for your craft and managing people to so similar tasks.  Sometimes you just want the flexibility of working for yourself and you enjoy mastering the craft.   Not everyone's end game is more money.   If marketing and sales are not your strengths, yet you still have a steady stream of future clients, or can pick some up when you need to...why over complicate things?  When I first started out many moons ago, there was a contract programmer working at one of my first jobs.  He worked 6-9 months a year, and then traveled and relaxed the rest.  The summer I met him he was going to complete visiting every National Park in the US; sounds like a nice goal to me :) Our consultant driven economy has removed all robustness from the economy.  Their drive for efficiency has produced an incredibly fragile economy.  Corporations are not suppose to retain any redundancy.  They force this on subcontractors.  As a result there are no trained and ready workers to step in as boomers retire.  The tendency to rely on H-1B has caused young workers to avoid any field where they are likely to be replaced by foreign workers.  Now that foreign workers are finding things better at home we have giant holes in the economy. "Why would you just look at salary and not total comp for a first year? It's pretty misleading to say ""$60k to work 100 hours a week"" when you do in fact get paid well above that.  Also, in my 2 years of consulting, I've never come anywhere close to 100 hour work weeks. It usually fluctuates between 45-60 hours. Not to mention Fridays are usually pretty casual/relaxed days since you're working from home or in your home office doing random firm activities/networking." "The ""independent contractor"" vs. ""employee"" distinction is a red herring to this discussion and not at all important just because someone suggested you use your LLC to do the job. Corp-2-Corp is a very common way to do contracting and having an LLC with business bank accounts provides you with more tax deductions (such as deducting interest on credit lines). Some accounting practices prefer to pay entities by their Tax ID numbers, instead of an individual's social security number. The actual reasoning behind this would be dubious, but the LLC only benefits you and gives you more advantages by having one than not. For example, it is easier for you to hire subcontractors through your LLC to assist with your job, due to the opaqueness of the private entity. Similarly, your LLC can sign Non Disclosure and Intellectual Property agreements, automatically extending the trade secrets to all of its members, as opposed to just you as an individual. By signing whatever agreement with the company that is paying you through your LLC, your LLC will be privy to all of this. Next, assuming you did have subcontractors or other liability inducing assets, the LLC limits the liability you personally have to deal with in a court system, to an extent. But even if you didn't, the facelessness of an LLC can deter potential creditors, for example, your client may just assume you are a cog in a wheel - a random employee of the LLC - as opposed to the sole owner. Having a business account for the LLC keeps all of your expenses in one account statement, making your tax deductions easier. If you had a business credit line, the interest is tax deductible (compared to just having a personal credit card for business purposes). Regarding the time/costs of setting up and managing an LLC, this does vary by jurisdiction. It can negligible, or it can be complex. You also only have to do it once. Hire an attorney to give you a head start on that, if you feel that is necessary. Now back to the ""independent contractor"" vs. ""employee"" distinction: It is true that the client will not be paying your social security, but they expect you to charge more hourly than an equivalent actual employee would, solely because you don't get health insurance from them or paid leave or retirement plans or any other perk, and you will receive the entire paycheck without any withheld by the employer. You also get more tax deductions to utilize, although you will now have self employment tax (assuming you are a US citizen), this becomes less and less important the higher over $105,000 you make, as it stops being counted (slightly more complicated than that, but self employment tax is it's own discussion)." "(Selling apps is AFAIK business, not freelancing - unless the type of app you produce is considered a freelancing subject. The tax office will give you a questionnaire and then decide).  As Einzelunternehmer, you can receive the payments for the apps to the same account where your wages go. However, there are lots of online accounts that do not cost fees, so consider to receive them on a separate account so you have the business and private kind of separate (for small Einzelunternehmer, there is no legal separation between business and private money - you have full liability with your private money for the business).  The local chamber of commerce can tell you everything about setting up such a business, ask them (you'll probably have to become a member there anyways). They have information as well on VAT (Umsatzsteuer, USt) which you need to declare unless you get an exemption (probably possible), and about Gewerbesteuer (the income tax of the business) etc. For the tax, you have ""subforms""  for the income tax e.g. for wages and for business income, so you just submit both with the main form. You'll get an appropriate tax number when registering the business.  Social security/insurance: as long as the app selling is only a side business, the social insurance payments for your main job completely cover the side job as well. You need to make sure that your employment contract is compatible with the app business, though.  A quick search indicates that there is a tax treaty between Germany and the Ukraine, Wikipedia says there are no contracts about social insurance in effect (yet)."