Contracting or Freelancing ?

A friend recently wrote me asking for some advise about contracting, which I think would be useful for a lot of freelancers.


It looks like I have a shot at a 3 month contract with Initech. I have a vague idea of what the going hourly rates are; but I don’t know anything about negotiating monthly or weekly rates. Do you have any suggestions on how to work out what to ask for?


Peter Gibbons

Welcome to the hardest part about business, pricing. For this, the type of engagement will change the price. There are at least two general types of engagements, Contracting and Freelancing. The problem is, the terms are used interchangeably in the industry so you’ll have to ask some questions to find out what they are looking for before rates even come up. To add to this confusion, the IRS might call the contracting relationship an “employee/employer relationship” and the freelance relationship an “independent contractor relationship”.


I consider contracting as a way for a company to “hire” an expert to help for a specific chunk of time. Aaron Erickson describes contracting as:

One way to think of the difference is that in contracting, you are strictly exchanging time for money, whereas in consulting, you are exchanging ideas for money. The act of contracting is highly focused on rate per hour and set of skills brought to the table. No other factors matter in the context of contracting, such as the intellectual property the firm as a whole brings to the table or the broader capabilities to staff a team of professionals and provide leadership to a project.

The Nomadic Developer: Surviving and Thriving in the World of Technology Consulting, page 40

When this is a contracting engagement you will:

  • be paid for a full week (40+ hours)
  • be working on-site for the majority of the time
  • use their systems to do the work (e.g. computers, network)
  • be “contracted” based on a time frame (e.g. for 6 months)
  • be working exclusively for Initech


A freelance relationship is one where you are brought in to complete a specific goal. For software companies, this is typically to develop a product or service for the company. Compared to a contracting engagement, when you are freelancing you will:

  • only be paid for the time you work and bill. 20-30 hours a week is common.
  • be brought on for the project and then move on afterwards
  • be able to charge a lot more than the standard salary. Amounts range wildly, but you can expect at least 35% more at the absolute bottom end (see below).
  • be able to work wherever you’d like
  • use your own systems to do the work
  • be able to work for other clients at the same time


Since the different types of engagement vary widely, you will first need to talk with Initech to find out what they are looking for. This means you might need to go into the meeting with two different numbers in mind, depending on what they want. From the look of it, I’d guess they are looking for a contractor relationship.

One thing to watch out for is, who is going to pay payroll taxes. If it’s you, then you need at least a 35% premium over your costs to pay self employment taxes. You should also check how the IRS would treat the engagement to make sure you are not becoming an employee without getting any employee benefits. The IRS has created a bunch of information and tests for you to see.

I hope this helps clear up some of the terminology and give you some tips on how to move forward. Good luck.

Eric Davis