Contracting: What are the Benefits? Is It for Me? Where Do I Start?
A brief introduction
Contracting continues to increase in popularity, both from the hiring companies’ perspective and professionals across all industries. Covid-19 has prioritised work-life balance and flexibility for many with Contracting offering an attractive alternative to full-time employment status. Contracting also has many other key benefits such as providing the opportunity to try out a new company or industry and see if it is the right fit for you before making a permanent commitment. It offers a financial incentive as well as daily rates are usually premium and pay more than a permanent salary.
There are a few main differences between Contracting and Temporary work that many are not aware of, here will compare some of these for you. Contractors provide a company with a specific skillset or offer expertise to a client for a specific project for a defined period. As an independent contractor, you work for yourself and have the flexibility to define your own work/life balance. Temporary employees are managed as employees through a recruitment agency like us here at Engage People. Temporary employees are hired for a fixed period of time usually to back-fill a role, work on the company schedule, and do not receive the same competitive rates as Contractors. Contracting provides individuals with a strategic career opportunity to own their experience, manage themselves and their own time.
In collaboration with Fenero, an award-winning specialist tax company advising contractors, we have put together this in-depth piece on the fundamentals of Contracting and how to get started.
1. What is Contracting?
Contracting is when an individual provides their skills or services to a client for a defined project or defined period of time. They typically charge a set daily or hourly rate for their services. As an independent contractor, you work for yourself and are not an employee of the client receiving your services.
In Ireland and the UK, professional contractors are generally required to operate using a limited company, including to issue invoices and manage tax affairs. There are many benefits to operating through a limited company which we shall touch on below.
There are two types of limited company structures which are suitable for contracting, an Umbrella Company and a Personal Service Company. If new to contracting, you should get advice from a specialist contractor company such as Fenero on the most suitable limited company structure for you and support on how best to maximise the financial benefits based on your own individual personal circumstances. However, we have set out an introductory explanation of the options below.
2. What is an Umbrella Company and when should you use one?
Umbrella Companies are a popular option for people new to contracting; this is due to their ease of use and flexibility. In simple terms, an umbrella company is a ready-to-go company which looks after insurance, invoicing and tax compliance for contractors and which can be used on a flexible pay-as-you-go basis.
They are typically used by multiple contractors at the same time and are managed from an administrative, legal and tax perspective by a specialist service provider, such as Fenero, who makes sure you are compliant with Revenue as well as helping you to maximise your take home pay.
Essentially, the Umbrella Company issues invoices for the services you provide and then processes your salary payments on your behalf when the invoice payment is received. Additionally, the Umbrella Company will process your tax relief on allowable business expenses. Good Umbrella Company service providers offer professional indemnity insurance protection, tax planning services and most importantly piece of mind on tax management and compliance.
A contractor uses an Umbrella Company for as long as they require the service, knowing when they walk away, all their taxes have been paid correctly to the Irish Revenue Commissioners.
The main downside of using an Umbrella Company compared to operating with your own Personal Service Company (PSC) is limited tax planning opportunities. If you are new to contracting however, we generally recommend that you start with an Umbrella Company for ease of use and until you decide if you would like to continue contracting into the medium or longer term.
3. What is a Personal Service Company and when should you use one?
A Personal Service Company (PSC) is a company owned by you and used exclusively by you. Contractors seeking more control over how they manage their contract income through a wider range of tax planning opportunities choose to operate through PSC’s.
As a general rule of thumb, a PSC is most suited to contractors who:
- Are looking to maximise their take home pay retention rate;
- Have a daily rate of €400 or more;
- Know they will be contracting for at least 12 months into the future.
If you are taking on a short-term contract and do not plan on contracting for more than 12 months, it is typically best to use an Umbrella Company. This is due to the additional obligations and costs associated with opening and closing your company as well as the restricted ability to maximise tax planning over a short time span.
4. What are the benefits of Contracting?
Historically, the financial benefits of contracting were the biggest driver to professionals taking up contracting roles. On average, individuals typically earn 20% to 40% more when contracting compared to being an employee.
When you add tax planning opportunities and the ability to claim expenses on top of higher daily rates, a professional can significantly increase their net salary or after-tax retained income levels by taking up contracting.
The impact of COVID-19 however is showing other factors becoming as equally weighted with financial rewards, and in some instances more important. For contractors who engaged Fenero as their service provider to take up contract roles in 2020 and so far in 2021, flexibility has been stated as being the biggest benefit of contracting.
Contracting offers other benefits such as the ability to gain new experience quickly in a desired field or getting away from office politics.
5. How do you get set up as a Contractor?
If using a specialist contractor service provider, it’s very easy to get set up as a contractor.
If you opt to use an Umbrella Company, Fenero can set you up within about 20 minutes. Simply reach out to the Solutions Team at [email protected] or at https://www.fenero.ie/ and we will advise you on the most suitable options for you and walk you through the simple process steps.
If you want to set up your own PSC, the process is longer as a new company has to be created which involves registering it with the Companies Registration Office (CRO) and the Revenue Commissioners who have their own processing times. You should allow about 4 – 6 weeks for the company to be established with the CRO and registered with Revenue. We will handle everything to get your new company set up. If you need or want to start contracting whilst your PSC is being set up, you can use one of Fenero’s Umbrella Companies.
6. Why go through a Recruiter?
Working closely with a contract recruiter is so important when you are seeking out a new contract role. Here at Engage People, there is a dedicated department for temporary and contract recruitment with a wealth of connections in the industry.
The benefits of going through a recruiter:
- Tap into pre-existing networks & relationships
A contract recruiter will have industry expertise and a wealth of experience to deliver advice and guide candidates through the process. They have industry contacts and will be able to provide information on roles that will be coming down the line. They also have market and company insights from their network and can give advice on daily rates.
- Access to hidden markets
Recruitment consultants are in the business of knowing. They recognise specifics about upcoming opportunities. A consultant is always networking, and thereby they learn about upcoming projects. They know about urgent roles that need to be filled and companies that
will soon be looking to hire. A recruitment consultant often has inside information and is sourcing for these openings long before they are ever advertised.
- CV and interviewing support
Many job seekers have only ever written one or two CV’s. Recruiters look at dozens of CV’s a day! They can provide you with suggestions on the key elements you should highlight and how to edit your CV. Recruiters can also give you information about courses or certificates which would improve your profile and tell you what skills are in high demand in the current market. When it gets to the interview stage, a recruiter will have in-depth knowledge about why the role is open, the personality of the interviewer, and what they are looking for in the company. They even know who your competition is and what sets you apart. This will ensure you give a great interview and give you a much better chance of landing the job.
7. Should I make the switch?
Contracting is here to stay and continues to increase in popularity, both from the hiring companies’ perspective and professionals across all industries. Contracting allows you to gain experience in a new company or industry. It also allows for more flexibility and independence. Contracting offers significant financial gain compared to a permanent role and is a very good option to consider.
Sometimes professionals in permanent roles can be hesitant to take on a contract role as it is seen as less secure. However, most contractors are hired for 6-12 months and frequently are extended beyond that time. Contracting professionals still have notice periods the same as permanent employees and cannot be laid off without notice. It’s helpful to consider that if you take on a permanent role, you are usually still on a 6-9 month probation at the beginning, during which you are being closely monitored based on performance and you can be let go with no notice.
With work-life balance being a top priority, career experience, financial gain, and working flexibility being front of mind, it is a great time for candidates to make the switch to contracting! Many companies are currently looking to hire contractors as it is a very appealing solution for companies looking to move projects along and hire experts to join their teams.
8. What to do next…
If you are considering taking on a contract role or just want to learn more about the market, Róisín Murray in Engage People would be very happy to discuss with you. She can be found at [email protected] or at 01 699 4525.