(***Please note that this article was written several years ago. Daily rates have gone up since then. You can find a range of daily rates published on this website.***)
There is no doubt that
Contract Pilots have become a significant segment of the professional aviation
community. No longer is the proverbial
"pilot doing contract work" the unemployed pilot in between jobs, so
much as they are now the "professional, dedicated, independent contract
pilot" (IC Pilot), choosing the lifestyle of the self employed business
person, and the road to personal freedom.
Dedicated contract pilots are here to stay, and provide a valuable
service to all types of flight departments, and their value is becoming more
evident in today's market.
The life of an IC Pilot
can be interesting to say the least.
First of all, when a pilot decides to be an independent contractor, they
become a business, and must operate within normal business practices. This entails such things as setting up
business infrastructure, developing marketing plans, defining and targeting the
customers, establishing a budget, positioning themselves as current and
qualified as defined by the applicable FAR's (91 or 135), and executing the
business plan. This takes considerable
effort, time and money to accomplish.
Consequently, as in many businesses, the first year or two are not the
profitable years due to the large investments required to position themselves,
training being the largest single expense.
Also, extraordinary discipline is necessary during the course of the
business, including keeping the budget in line with future expenses, e.g.,
setting aside quarterly Estimated Tax payments, future training money, health
care premiums, setting aside funds for retirement, etc.
Many think that the life
of an IC Pilot is carefree, but that is hardly the case. The common misconception is that the
contract pilot can work when and for whom they want, at their total
leisure. That is far from the
case. The IC Pilot develops their
business, starts getting the calls, books trips, has some trips canceled,
others pop up, and it becomes a huge juggling act. Sometimes the IC Pilot leaves home, gets calls on the road, goes
from customer to customer, and will be gone from home months at a time. Other times, the contract pilot sits at home
wondering why nobody is calling them at all, worries about "making the
nut" for the month, and is fraught with worry. Still, other times they book a trip, get other calls which they
have to turn down or refer to other colleagues, then at the last minute their
scheduled trip cancels, the other customers have filled their needs, and the
contract pilot is left with nothing.
These scenarios are normal occurrences and become the juggling act of
the self-employed. I would not classify
the life of an IC Pilot as carefree and easy going. It can be really tough, just like any other business.
The positive and negative
sides of the contract pilot are numerous, but probably as balanced as any other
self employed businessperson. The
single most negative side is covering the costs of annual training, which
depending on the aircraft the pilot is operating, can be as much as $25,000 or
more a year, plus travel and hotel expenses while at school. Secondly on the negative side are the costs
of self-employment taxes and health insurance.
Thirdly, inconsistent income on a month-to-month basis. And lastly, the unreliability of consistent
work, consistent customers, and general consistency of your life.
The positive sides can and
will balance the negative sides.
Independent Contractor status is a personal choice, and is primarily for
the entrepreneur at heart. It takes a
special kind of person to choose self-employment, and it can be done for a
variety of reasons. More scheduled time
with your family and friends (take time off when YOU want the time off) is one
big benefit. The feeling of
"personal freedom" and "choice in life" are attractions to
many. And there is also a sense of
mission and accomplishment by becoming a contract pilot. Every single time the telephone rings from a
customer, they are looking for "help," and you are dedicated to
"helping" them. Whether they
need a Copilot, a Captain, or augmented crew for long-range operations, they
have a "need," and the IC Pilot is there to help them fill that
"need." So you go out on jobs
with that sense of "helping" the customer. That can be very satisfying.
And when they call you, if you can't help them, then it is your business
to "help" them find someone who can.
So you still "help" them in either case.
The tax aspect of the IC
Pilot business of is an interesting subject.
First and foremost, the Tax Man does not care whether you earn you
income from payroll, or self-employment, he just wants his cut. And to get his cut, he has written tens of
thousands of pages of Tax Code, to boggle your mind, fool you, and confuse the
general public. Ain't it great to be
American? In the case of the
self-employed contract pilot, they must develop the business discipline of
setting aside funds to pay the Quarterly Estimated Tax Payments, which are due
and payable every March, June, September and December. Failure to pay estimated taxes results in
end of the year penalties, which can be substantial for under reporting! So good book keeping and the discipline to
set aside the funds are paramount in a successful business practice. For a "rule of thumb," it behooves
the contract pilot to set aside 20% of the gross income for future tax
payments. This can be set-aside in an
interest bearing account of some kind, and it is there when the payments are
due. The other rule of thumb is to set
aside another 20% of the gross income for future training costs, because those
checks to FlightSafety or SimuFlite WILL COME DUE, if you want to remain in the
independent contract business. The
training due dates are when most wannabe IC Pilots get panicky and run for the
security of a JOB! However, if they
have practiced the discipline of budgeting, then the IC Pilot has more options
when that time comes due. If you save
for the future, then the future can be your choice. Pay heed to this advice, if nothing else.
Now the upside of the tax
issue is a wonderful thing. The IRS
gave the self employed something that the employed don't have. Schedule C . . . what a wonderful thing! As a self employed entity, all your training
costs, laptops, pilot supplies, health care premiums, some of your uniforms,
meals and entertainment, office supplies, advertising, etc., are tax
deductible! Just about everything you
do in furtherance of your business can be used to reduce your tax liability. The full time employed pilots don't have
that. So tax wise, usually the IC Pilot
"net" is much better. Even
the costs of hiring tax CPA's and Attorney's are deductible. How can you go wrong? Of course, the other side of that coin is
the additional overhead of running your own business, but, hey, business is
business.
The issues of medical,
dental and retirement plans could be considered some of the more difficult
issues for the self employed, but once again, there are benefits to these
expenses. Of course, it helps if your
spouse works and is covered by a medical plan, but everyone does not have that
opportunity. There are medical plans
available for the individual, and that is one option for each IC Pilot to pay
their premiums for medical coverage plans.
I think that perhaps, with the increased interest in independent
contract pilot business, that in the near future, IC Pilots will be able band
together as a group, and will be able to develop a group plan for medical and
dental coverage that will benefit all the self-employed pilots. That, of course, remains to be seen, but for
my part, I intend to help develop this "group."
Retirement plans are
entirely up to the individual. You save
and invest your own retirement funds just like any other small businessperson
in America. This takes discipline and
should not be treated lightly. The
upside is that through your business entity you can set up your own retirement
plan, whereby you and your entity both contribute to your retirement plan,
called SEP (Self Employed Plan). Here
you can contribute much more than the $2,000 a year the full time employed
people do. As with the "rule of
thumb" for setting aside training and tax funds (20% each), you can
develop your retirement plan by paying yourself 10% to your retirement
plan. That’s my recommendation, and it
works for my family and me.
If you notice after these
"rules of thumb," you have set aside 20% for taxes, 20% for training
and 10% for retirement; your take home is about 50% of your gross income. You need to learn to live within that
means. Depending on how successful your
IC Pilot business is, it will either work very well for you, or it won’t work
at all. It’s all up to the individual.
Another "set
aside" slush fund needs to be expenses.
Inevitably, you will be covering your hotels, airfare, meals, etc.,
which will be billed back out to the customer.
Generally there is some lag time between the invoice date, and the time
your credit cards come due, so your slush fund needs to be in place to avoid
all the credit card interest and late payment charges. Generally I have found the Invoice date and
the time you actually receive the payment to average 20 days. Though some customers will stretch you out
for up to 30 days or more. Needless to
say, they are not the favored clients.
Who are the customers? That's pretty easy . . . the owners and
operators of the aircraft. Each
contract pilot will maintain their currency under applicable FAR's (91 or 135)
in one or more type aircraft, and finding the owners of those type aircraft is
nothing more than normal research.
Contract pilots are based
all over the world. Part of choosing to
be an independent businessperson is the ability to choose your lifestyle and
your living location. However, the
closer to a major airline hub that one resides, facilitates the ease and costs
of positioning to the customer aircraft locations. I know IC Pilots who choose to live in remote parts of Montana
and Idaho, and I know IC Pilots who choose to live in major metropolitan areas. That's a personal choice, and if one chooses
this type independent work, then they should follow their heart and live the
way they want. But again, those living
in major airline hubs will find it much easier, more efficient and more cost
effective to travel to the customers location.
As the IC Pilot segment of
the aviation community develops, there are some information the contract pilots
should share with the Chief Pilots, owners and operators of the aircraft. Namely, often times, utilizing temporary contract
pilots is much more cost effective than hiring new, full time pilots. Here I refer to "additional crew"
required by longer international operations or an increase in department
flying, justifying one or more additional crewmembers. There is never a consideration for replacing
entirely a flight operation with contract personnel. That, in itself, violates the IRS rules (Section 530, IRS
"Safe Harbor" Ruling, 1979) whereby the definition of an
"Independent Contractor Status) is defined. I suppose people in the past have paid their "full time
workers" under "temporary employee" status, to get out from
under the Social Security Taxes and other salary burden associated with payroll
taxes.
For the purposes of
augmenting a flight department, consider the following scenario:
Assuming the going pay
rate for a Gulfstream Pilot is $100,000 per year, then the hiring company
payroll will realize approximately a 30% payroll salary burden (Social Security
taxes, workman's comp, Insurance, 401K's, and other benefits), that brings the
salary cost of the employee to $130,000 per year. Then account for the required annual flight training at a cost of
approximately $25,000, the result is the cost factor of that employee pilot to
be $155,000 per year.
By utilizing the services
of independent contract pilots, who charge a flat daily rate plus expenses, at
$800 per day (for example), that provides the operator with 194 days of
contract pilot usage to break even from the full time versus. Of course, there are additional expenses
incurred with contract pilots, such as airfare, hotels to and from the
originating flight location, so it would be fair to apply a percentage of
"expense cost" to this equation.
My personal experience from 5 years of Invoicing the customer daily
rates and expenses, demonstrates about 8% costs associated with moving me to
and from the job site. These expenses
are only for airline to and from the job, plus any first day / last day hotels,
and do not include expenses associated with being on the road with the
aircraft, as those expenses would be incurred with either a contract pilot or
full time pilot equally.
Taking the $155,000 figure
previously derived, subtract the 8%, the total break even cost is $142,600,
divided by $800 a day for the contract pilot, you have 178 days whereby the operator
can use a contract pilot and break even compared to a full time employee. That makes good business sense, and often
times is more cost effective from the operators’ standpoint.
Of course, obviously the
reliable availability of a full time pilot employee is greater than finding the
contract pilot, so I always encourage the operators to have their
"list" of dedicated IC Pilots, making it easier to find somebody to
help. In most cases, I am more than willing
to help an operator develop a list of qualified, reliable IC Pilots. This willingness to "help" them,
results in their appreciation of professional, DEDICATED contract pilots with a
good attitude for BUSINESS.
Furthermore, when you help the operator build their IC Pilot list with
your colleagues in the IC business, you will find that “favor” will come back
to you in your own future business.
Finally, there is the
issue of daily rates that contract pilots charge. It is "old ways" that contract pilots accept what the
operator "offers." True, many
supposedly "contract pilots" will ask what the operator pays, but
most professional, dedicated IC Pilots have their rates established, and inform
the operator what those fees are.
Obviously the rates will differ from aircraft type to aircraft type, and
that varies even from one part of the country to the next. I believe that is slowly changing, and the
USA will become more standardized in the future. Why standardize? Because
to be an effective IC Pilot, one has to maintain their training currency, and the
training organizations don't vary their rate depending on which part of the USA
the pilot lives. So those training
costs become pretty fixed overhead, and expensive overhead as well.
Additionally, I feel it is
important that as a group, the IC Pilots should become standardized. I have seen, over the past two years, a
standardization of rates that demonstrates that IC Pilots stick together more
than any other professional pilot outside the airline unions. And that is impressive. When some of the wannabe contract pilots cut
their rates back to get business, the rest of the community knows really
quickly about it (thank you to the internet), and those “cheap pilots” get shut
out of the IC community pretty fast.
Besides, the “cheap wannabe pilots” are the first to run when their
training dates come due, so they are not really serious IC Pilots after all.
I can speak for the
Gulfstream aircraft (my specialty) and the rates nationwide tend to average
$600 to $700 a day for the GII and GIII aircraft, and $700 to $800 for the GIV
(these are 1999 rates as of the printing of this document, and will probably go
up next year). I hear that the GV
pilots are getting nearly $1,000 to
$1,250 a day. But the contract pilot
can charge what they want. It's a free
enterprise system and that is one of the advantages of being
self-employed. However, some effort of
conformity to industry standard rates does benefit the contract pilot
community. A professional person
deserves to be treated in a professional manner, and the owners of a
$30-million aircraft should realize that, and not try to save one hundred
dollars when they are looking for highly qualified professionals to operate
their investment.
Other type aircraft daily
rates I simply don't know. I hear that
small jets go around $300 to $400 per day, and midsize jets go for $400 to $500
per day, but I really don't know that for sure. Perhaps a poll on the Internet would gather this information.
Another issue that comes
up on occasion, is the Chief Pilot will tell an IC Pilot that they only need
them as a Copilot, so they think the rates should be less. Well, the truth is that the training
organizations don't give discounts for "Copilot." Nor the time spent
in the right seat of the simulator. You
are either rated and qualified and current in the aircraft, or not. Left seat, right seat, back seat, it is all
the same when it comes to paying the bills and overhead generated by being
self-employed.
Finally, in closing, below
is a letter I posted to several potential newcomers to the contract business,
and I am including it here. I wrote
this piece in response to pilots asking me about the contract business, and it
was written almost two years ago. Many
of my attitudes have changed since, but it is still a good thought line that
may again be appropriate here.
Enjoy life, fly safe, and
be true to yourself.
SiBeck Pilot Services
Gulfstream GII / GIII /
GIV / GV