Why are consultants’ fees so high?

Hand holding moneyIndependent 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?
[box type=”note”]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.[/box]