More tax, less benefits: Is working as a contractor right for you?
Flexibility and the pay opportunities come at the cost of job insecurity and tax downsides
As a contractor, you can move between companies more easily, and thus work on a greater variety of projects. Photograph: iStock
It’s a modern revolution; instead of getting a full-time job, an increasingly large number of people are working as contractors. Organisations as diverse as the public sector, smaller companies and large multinationals are embracing the concept of hiring contractors.
In some sectors, it’s individuals themselves driving the change, but in others, such as tech, companies are opting to staff whole functions with contract workers.
Google for example, has about 7,000 employees in Ireland but it is estimated that about half of these are contractors, while Facebook outsources some of its content moderation to contractors.
Recruitment firm CPL, which recruits many of these contract workers for multinationals, is booming from the growth in this side of the business. Its “flexible talent” division had a headcount of some 12,296 workers last year, while fees from this side of the business accounted for 68.4 per cent the total gross profit last year.
But while the benefits to the employer are clear – more flexibility in scaling up and down your workforce as demand requires without being subject to employment law; a potentially cheaper way of hiring given there is no requirement to offer company benefits; and no need to pay employer’s PRSI – the benefits to the employee are not as evident.
“Contracting can have some great financial and lifestyle benefits but it’s not for everyone,” says Sinead Doherty, chief executive of Fenero, which offers a specialist tax and payroll service to contractors. “Contractors can benefit from much greater tax planning and pension planning options, higher salaries and increased flexibility. However, there is more risk associated with it.”
She sees contracting becoming more of a “social norm”, given the growth of the gig economy. Last year, almost half of all enquiries to its contracting service were people trying it out for the first time.
“And this percentage is already higher again in 2019,” she adds. So if contracting is an option for you – or you’re already working as a contractor – what do you need to know to make sure you’re getting the best deal?
Why contracting can be better
More pay: Contractors can often attract better rates than their full-time equivalents. They are often highly paid workers who will be assigned to a particular project for a fixed period, typically no longer than six months.
Susan Nix, associate director, financial services, with recruitment firm Morgan McKinley, says typical daily rates are of the order of about €500-€650 for a project manager. Rates of €800- €900 a day are available but these are “highly unusual”.
“It can be lucrative,” she says, noting that someone earning €650-€700 a day would bring in about €150,000 a year if they worked for 226 days, “and there aren’t that many €140-150,000 roles in Dublin”.
Greater flexibility: Contracting also offers you greater flexibility. You can move between companies more easily, and thus work on a greater variety of projects.
“Contracting allows you to move between companies and different projects easily to give you exposure to new work regularly, and without it being seen as a negative thing on your CV that you are moving around frequently,” says Doherty.
In addition, if you find yourself in demand, you can avail of a little holiday each time a contract ends and before another begins.
Tax: Contracting can also offer better tax and pension planning opportunities. Typically, contractors will set up their self-employed structure in one of two ways – either as a limited company or availing of a service for an umbrella company. According to Doherty, the former involves more costs (at about €300), as you have to set it up from scratch, while you also have to close it down if you stop contracting.
But it can be more beneficial from a tax perspective.
“The more money you’re earning, the more you’re going to be interested,” she says of limited companies. Indeed a limited company allows you to smooth your tax liabilities and gives you more control over when and how much you pay yourself.
In addition, a limited company gives you superior tax benefit options when it comes to funding a pension.
“When you have your own limited company, you can set up an executive pension and the company can pay employer contributions. These employer contributions aren’t subject to the same age-related limits and there are different upper limits,” says Doherty. This means you can avail of greater tax relief to fund your pension.
You can also reduce your tax bill by claiming expenses incurred in your working life, but as Doherty stresses, these need to be legitimate business expenses.
Another advantage for the self-employed is the introduction of the earned income tax credit, which is now worth €1,350 a year – although PAYE workers still have a higher credit.
Getting a mortgage: In the past, getting a mortgage often proved difficult if you were not in a full-time permanent position. Now, however, the picture is much brighter. Joey Sheehan, head of credit with Mymortgages.ie, says banks are now looking much more favourably on contractors.
“Once they have a good level of income, the banks are looking at them on the same basis as if they’re full time permanent employees,” he says, noting that many contractors will have significant education and experience which helps in their application.
The one caveat he would add, however, is for a contractor starting out after college. “They might find it more challenging,” he says.
Why it can be worse
Pay: As mentioned above, contractors are often paid a premium. However, this is not always the case. Last year, Google in Ireland said it would address concerns that contractors were being paid less than the living wage, or about €23,000 a year.
And it’s not just Google. We found a recent ad on indeed.com for a web user interface designer with four-six years’ experience. The offer was between €150-€200 (excl VAT) a day, which translates to an annual salary of about €36,000 at the lower end. As we will see below, given the extra costs and lack of benefits in contracting, a worker on such a daily rate could well be better off (financially at least) in a full-time position.
And, while salaries have been rising, daily rates haven’t to the same degree.
“Salaries are increasing but daily rates aren’t [moving] at the same pace,” says Ms Nix. “We feel the gap is closing a little bit there,” she says, noting that someone charging €450 a day (about €108,000 a year) would command an annual salary of about €80,000.
PRSI: As a contractor, you will be self-employed, which means that you will pay class S PRSI at a rate of 4 per cent. The downside of this is that you won’t get all the same benefits as someone who is a full-time employee paying class A PRSI. While your Class S stamps will go towards ensuring eligibility for the state pension, you won’t have any entitlement to benefits such as illness benefit, the invalidity pension and jobseeker’s benefit.
However, this is changing. Job seeker’s benefit, which has traditionally been unavailable to the self-employed, is intended to be introduced from around November this year.
It does mean of course that by hiring contractors, employers can avoid employer’s PRSI.
In some cases, it will be the contractor themselves who ends up paying this extra tax, if they opt for an umbrella type company structure, at a rate of 10.95 per cent. While this extra levy ensures that they get to keep all their state benefits, it is also a significant extra cost, and will hike up your effective tax rate well north of 50 per cent.
Tax: Another downside of being self-employed is a potentially higher rate of tax. As Michael Rooney, tax partner, people advisory services, EY Ireland, points out, those earning more than €100,000 a year will pay a universal social charge surcharge of an extra 3 per cent.
“It’s not really equitable,” he says. While there has been considerable opposition to it, the Government continues to leave this surcharge in place, affecting an estimated 29,000 people.
Job insecurity: As a contractor, you can be let go at any time, and you won’t be protected by current legislation offering certain rights to employees. This means, for example, that even if you believe your contract has been ended unfairly, you can’t sue for unfair dismissal under the Unfair Dismissals Act if you’re a contractor.
Lack of benefits: As a self-employed contractor, you won’t be getting the same benefits as the full-time employees who work alongside you. Again, this point comes back to your daily rate; if you’re being paid a hefty premium over the typical annual salary for the position, this premium can make up for the lack of these benefits.
If you’re not, however, then the lack of these benefits can be a significant factor.
Consider pension contributions; many employers will offer at least 5 per cent of your annual salary towards your pension. On a salary of €60,000, this works out at an extra €3,000 a year in “pay”. Health insurance might also be included (although you will pay benefit in kind on this), as might maternity pay – up to six months full pay in some companies – and paternity pay. Or what about sick pay? While this might not affect you if you’re rarely sick, if you do find yourself struck down with something chronic, you won’t be entitled to any sick pay from the company you’re contracting to.
And remember, as a self-employed person, you may not be able to claim illness benefit either (depending on what class of PRSI you’re paying).
There is a possibility of taking out a sick pay insurance policy, but again this will cost. CPL for example, suggests a policy for €30 a month which protects in the event of sickness.
Administration: Another downside is that rather than having a payroll department to process your taxes, you have to run your own business, or pay for someone else to do it, such as an umbrella company, or setting up a limited company. And all of these things cost.
“You see a lot of companies looking at individuals to have own personal service/umbrella company, because they want to pass the risk onto that company,” says Rooney. Shelbourne Accountants for example charges €110 a month (€1,320 a year) for an umbrella type company, while a private limited company will cost €140 a month (€1,680 a year).
Upskilling: As a contractor, the company for whom you work will be unlikely to invest in training for you, so any upskilling you do intend will be paid for by yourself –- although this is tax deductible.