Should I become a contractor and what’s involved? My main concern is the uncertainty that goes with working as a non-permanent member of staff.
My personal circumstances have changed recently and I’m seriously considering setting up as a self employed IT contractor. At the moment I have a full-time job with a large multinational based in Dublin but I have seen many of my peers and former colleagues establish themselves as contractors and earn a very good living as a result.
SHOULD I BECOME A CONTRACTOR
There are many benefits of becoming a contractor, just as there are downsides.
The first indicator as to whether or not a move like this is for you should be your financial circumstances. Could you maintain your personal overheads and commitments, as well as your lifestyle, if you were not guaranteed a salary every month? It may be difficult to work out right now but you should have an estimated figure in your mind of how much you would like to earn and how you will reach and maintain that target.
Furthermore, before you make any move, try to ensure that you are financially secure for at least four monthswhile you get set up. In fact, having a buffer like this available at all times is advisable to see you through between projects.
As you may have noticed from monitoring the progress of your former colleagues, setting up as a contractor is extremely attractive, as long as you can secure enough work to sustain yourself and the business.
In general terms, contractors can expect to be paid up to 25% more than PAYE employees, while the opportunities to travel and to gain greater insight and experience into new, high level technologies and other organisations is a tempting proposition.
However, first you need to figure out which set-up model best suits your needs.
SETTING UP
Usually, most contractors see the sole trader option as the most attractive; tax is not payable under the usual PAYE system and annual accountancy fees are generally a lot lower than a limited or umbrella company.
However, becoming a contractor where you are working usual hours in the offices of a third party, five days per week, and are carrying out services on behalf of that third party, could land you in trouble with the Revenue Commissioners.
Under their criteria, you will not meet the ‘self-employed’ guidelines; you will only conform to Revenue’s rules in this area if you have multiple clients rather than switching from a full PAYE role to a position as a contractor with the same company.
Umbrella companies are popular for those in your position. This is where a company is established and run by a third party. You, as a contractor, become an employee of the company and are paid a salary based on your earnings. The upshot of an umbrella company is that most of the administration work, such as tax, VAT returns and invoicing, are taken care of by the third party. This can be a particularly useful method if you are not totally convinced that going out on your own is for you “ it offers more security than a sole trader and is more cost effective than a limited company, which you can always form at some time in the future if you decide to pursue the idea.
If you conclude that your long-term career objective is to establish yourself as a contractor, creating a limited company is the best option. Be aware that once you do, you must file annual accounts to the Companies Registration Office, which are freely available to anyone who wishes to access them.
Yearly accounting fees will also be higher as your company will have to comply with the Companies Act, as well as accounting and auditing standards. The flip side is that by outsourcing your accounting requirements to an experienced professional, you can focus your attention on growing your business with peace of mind that your financial responsibilities are in order.
The pros of a limited company, in many cases, outweigh the cons. For instance, you, as a shareholder in a limited company, cannot be held personally liable for most company debts “ banks loans differ in that most financial institutions will require a personal guarantee. Furthermore, any personal assets that you own are protected, while customers and other service providers often place more confidence in dealing with a limited entity.
So, should I become a contractor? Whatever you decide is best, you will also need to carefully consider your career goals. Very often, working for yourself means longer hours than normal given that you will be responsible for any administration duties of the business. It is also crucial to constantly generate leads for future business even when working on projects for other firms “ maintaining a steady flow of clients will be crucial to your future success. However, you will be better able to manage your own time “ many contractors state the freedom they have as one of the main advantages of becoming self employed.
COMMON MISTAKE
Be aware that many people in situations like this make a mistake when calculating their take home pay. As a contractor, you can only expect to be paid for the days you work. So, rather than 365 days, individuals in your position should plan to be paid for roughly 220 days per year when weekends, bank holidays, public holidays, and annual leave are taken into account.
Another potential downside is that your clients are unlikely to fund further training for you given the non-permanent nature of your contracts. Consider whether or not you can afford to maintain the costs of upskilling yourself to ensure you retain a position of competitive advantage at all times. If you choose to do so, your accountant will be able to advise you of the many tax benefits that arise from such an investment.
There is a lot to think about here but, if you feel that this is right for you, it can be a very rewarding and positive move to make. Best of luck!
