The Rewards (and Risks) of Becoming a 1099 Solo Federal Sub-Contractor
This piece is adapted from an article I wrote for the CNortonNet mailing list. If you're a government contractor looking for a job and or a government contractor who is looking to hire, Fred Harrison, the list owner, will send out both resumes and job openings to the mailing list.To join the list you can e-mail Fred at firstname.lastname@example.org and ask to join.
My 1099 Transition
In early 2015, I was ready to make a change. I had been working for my employer, a federal human capital consulting firm, for a few years at that point and I knew I wanted to work for myself. After assessing what my odds were of successfully pulling this off, I pitched the idea of sub-contracting to my company. I was nervous, and my company did not seem overly eager to agree to the arrangement, but eventually they did.
I increased my take-home pay by nearly $25,000 (a nearly 25% increase over my compensation as an employee) while only working only four days per week and doing the same exact work as I was doing as an employee.
Over the next few years, I managed to raise my rates and earn over $200k per year from direct billable work while taking liberal amounts of vacation (5-6 weeks per year) and only working on projects I chose for myself as a workforce/data analyst.
I’m not telling you this to brag about how exceptional I am. I am telling you this because as a federal contractor, you might also be in a good position to turn your current job into your first 1099 federal sub-contracting gig to earn more money and increase your autonomy.
When I was considering becoming a 1099, I was both nervous and excited. Nervous because there was nothing particularly remarkable about my professional profile. I was a human capital consultant with above average Microsoft Excel data analysis skills. Excited because I knew that pulling off the transition would mean I would no longer be subject to the aspects of employee life that I found particularly unpleasant (useless performance reviews, anyone?).
The 1099 life isn’t for everyone. It works best if you’re in a role in a field that is neither too commoditized nor too managerial. If you are a junior administrative assistant, becoming a 1099 with any sort of reasonable terms is a long shot. If you’re a senior executive at a large company who does very little direct billable work, your path to business success probably lies elsewhere. However, for a large portion of the federal contractor workforce, 1099 is a great way to make the most of your career.
What is a 1099 sub-contractor?
A 1099 independent contractor is someone who works for themselves and is not an employee. The 1099 part refers to the income statement tax form you receive from the companies that pay you. In contrast, a W2 employee is someone who works directly for a company. The W2 part also refers to the income statement you’ll receive at the end of the year from your company.
As a 1099 government sub-contractor, you would be performing work for the prime contractor who won the contract from the government. The company would pay you for the work you are doing for the real client, which is the government. It is possible to sub-contract to a company that is, itself, a sub-contractor. However, many government contracts prohibit this practice which is called 2nd-tier sub-contracting.
The rewards of becoming a 1099 sub-contractor
There are many reasons you might want to become a 1099 contractor. But the two most important reasons are 1) to increase your income and 2) to increase your autonomy.
Increase your income
As a W2 employee, you have some opportunities to increase your salary, but you are subject to the pay system your company has set up. If you work for a large company, it’s unlikely you’ll get a raise substantially larger than 5%, even if you perform at a high level. You do not have direct control over your income.
As 1099 contractor, you decide how much you charge for your work. Of course, this is subject to what the market will pay, but there is no complicated pay management system to which you are subject.
As a government contractor, your company pays you X and bills the government X + Y. The Y is their margin. If you become a 1099 contractor, you can capture much of that Y margin for yourself.
Increase your autonomy
As a W2 employee, you have limited control over your tasks or your time. If your boss wants you to work extra hours on a proposal, you have to do it, even though you don’t reap direct rewards if the proposal is successful.
If you want to take time off, you have to get approval from your boss. And you can only take up to three weeks (or however much your company offers). Even if you wanted to take unpaid time off, HR has to get involved. It’s a pain.
As a 1099 employee, you decide what projects you work on (mostly) and you decide how much time you can take off.
The risks of a 1099 sub-contractor
Becoming a 1099 sub-contractor is not risk free. Anyone that says otherwise is lying to you. There are two primary risks you must be aware of:
As a W2 employee, you are potentially sheltered from some of the risks you may face as a 1099. For example, if you work for a large federal contracting firm and the contract you work on ends, there may be a good chance your company can find another project for you. You will continue to receive a salary in between projects.
As a 1099, if a contract ends or falls through and you do not have another one lined up, you will not be earning income. You are responsible for finding your own projects and managing the transition between them such that the gap in income is acceptable to you.
During my time as a 1099 contractor, I’ve experienced gaps in between contracts (or even on the same contract) ranging between one and nine months. The gaps were for different reasons. One time a project’s funding did not get renewed quickly enough so work ended while the contractual details were worked out. Another time, a project was moved to an entirely different contractor and prime vendor and I could not negotiate a sub-contracting deal with the new company. Most recently, I had my security clearance adjudication delayed for many months and when it was finally renewed, COVID-19 hit and I could not on-board in time.
Delays or gaps translate into lost income for you as a 1099 sub-contractor. However, it is precisely because you are taking on this risk (previously assumed by your employer) that you also have the opportunity to reap the rewards.
If you are seriously considering transitioning to becoming a 1099 sub-contractor, you must also make sure you are competent enough to meet the commitments you make.
If you take on a project and don’t deliver, your reputation as a business will suffer, potentially jeopardizing future engagements.
If you don’t perform well as a W2 employee, your reputation might suffer within your company or with that particular client, but it’s really your employer’s reputation that will get dinged a bit. Your company may even offer you remedial training or offer to transfer to you a different project that is a better fit. Or, worst case, you get a new job at a different company and you get a sort of professional “reset.”
How to manage the risks before making the leap?
The primary method I advocate in my upcoming guide is to turn your existing job as a W2 federal contractor into a 1099 position.
It is critical, however, that you take action to increase your odds of success. As a starting point, you need do the following:
- Conduct a personal value assessment
- Conduct a “replaceability” assessment
- Conduct a financial assessment
- Conduct a contractual feasibility assessment
Personal value assessment
In order to even begin considering making the transition, you need to determine how valuable you are 1) to your government customer or client and 2) to your company. If you are not valuable to your government customer or your company and you pitch your company on a 1099 arrangement, they will simply say “no” and possibly begin finding your replacement.
Only you can determine whether or not you are valuable at your current job.
Here are some questions to ask yourself to help make this assessment:
- Does the government customer frequently come to me directly to perform work tasks and provide information?
- Has the government customer told my boss about the great work I’m doing?
- Has my boss told me I’m doing great work?
- Have I received any unique cash bonuses or rewards for my contributions to the project?
If you don’t regularly receive concrete, positive feedback or indicators of your value, hold off on making this transition until you do. Otherwise, you are likely to risk failing.
Even if you are valuable to your customer, if your company is able to replace you with someone that is just as good or better than you (or perhaps less costly), your odds of success will be lower. You know your line of work and industry better than I do, but answer the following questions to get a sense of how quickly your company can find someone else to do your job:
- Is my skill set in demand and valuable?
- If I were to leave my project, would it take my replacement a long time to get up to speed on my work? Could the project collapse entirely?
- Are there similar positions on my contract that have remained vacant for a long time?
- Is it easy for me to get interviews and job offers at other companies? When I post my resume on NortonNet do I get e-mails and phone calls from recruiters?
- Do I have a hard-to-get security clearance?
If you are difficult to replace, your odds of successfully negotiating a 1099 agreement obviously increase.
One of the reasons you want to become a 1099 sub-contractor is to increase your income. However, the potential earnings increase needs to be enough to be rewarding to you personally and account for the revenue risks.
As a starting point, you should determine what your target “billable rate,” which is what you would your company per hour.
If you happen to know what your company is billing for your position, great! You should target 80 to 90 percent of that rate. If your company bills you out at $100/hour, you can potentially bill them $80-$90/hour.
If you don’t know what your company is billing for you, you can get a crude estimate by taking your salary and dividing by 1,000 and then getting a range of +/- 20%.
If you make $100,000, divide that by 1,000 and you get $100/hour. The billable rate is probably +/- 20% of that number ($80/hour - $120/hour). Your rate will likely be somewhere within that range.
You then need to multiply your target rate by the number of billable hours you will work per year. Let’s take 1800 hours which is a full work year minus all federal holidays and includes five weeks of vacation.
If you bill $80/hour, you will earn 1800 * $80 = $144,000.
It is critical to note that you will have additional expenses you did not have as an employee (such as business insurance and self-employment taxes) and that you will have to pay out of pocket to replace benefits previously provided by your employer (such as health care).
I estimate these additional costs will total between $10,000 and $25,000 with most of the difference in that range attributable to health care costs. At this point, your net income is between $119,000 and $134,000, given the assumptions above. Compare that to your current compensation as an employee and see if it’s worth it to you.
Over time, especially as your skills improve and you become more adept at navigating the 1099 sub-contracting world, you can increase your rates and earn far more. The above numbers are similar to my earnings when I started in a more junior role, but as I became more experienced, my income jumped nearly $100,000 annually. Assuming you work 1800 hours per year, every $10/hour increase is equal to $18,000!
Contractual feasibility assessment
There are certain situations in which it may not be possible for you to sub-contract to your company, even if both parties are okay with it. The primary situation I’ve encountered is the contractual prohibition against 2nd-tier sub-contracting. If your employer is itself a sub-contractor to another company and the contract prohibits 2nd tier sub-contracting, you won’t be allowed to sub-contract to your employer. You would have to sub-contract to the prime (which I will cover in my Guide).
There are a few ways to confirm whether or not it would be permitted to sub-contract to your company, but you can simply ask your boss and say you’re just curious when he or she asks why you want to know. The other is to see if there are other 1099 sub-contractors currently working on this contract for your company. If there are, you’re good to go.
Is 1099 Federal sub-contracting right for you?
The annoying answer to that is, “only you can answer that.” However, if you’ve always had a bit of an independent streak and are okay with taking some risks, this path can be rewarding both financially and psychologically. Earning money on your own terms is wonderful! It’s also a more concrete path to working for yourself than trying to come up with an innovative idea and pitching to investors on Shark Tank. You can take advantage of your current skills and relationship with the government customer to become profitable much more quickly than starting from scratch.
For the right type of personality, it’s a rewarding way to make a living
If you have questions feel free to reach out to me directly at email@example.com. I can also add you to my informal mailing list in case I have updates or news or whatever.
This article spans multiple topics that I cover in the book (setting rates, assessing risks and rewards, determining if you are good candidate for solo 1099 work, etc.).
You can read more about it here:
Going 1099: How to become a solo federal sub-contractor and gain control of your working life, earn more money and unlock more free time