The contracting sector is booming at the moment and for good reason.
Not only are 21st-century professionals seeking more flexible working arrangements but hiring professionals are now beginning to understand the value and benefits of hiring an independent professional.
Companies who are actively hiring want to fill skill gaps within the business as quickly and efficiently as possible. The main solution for this gap is to hire self-employed contractors who can provide the required skills and hit the ground running. However, if you are now transitioning from being an employee to a self-employed contractor there are some key changes you may notice.
One of the main differences between an employee and a self-employed contractor is the contracts involved. An employee works under an employment contract, whereas an independent contractor provides services under a contract for services.
Payment, Taxation and Benefits
An employee is on a business’s payroll, so the company pays the employee their hourly wage or salary and withholds the appropriate taxes.
An employer often pays for employee benefits as well. These can include mandatory employment benefits, like health insurance, and other desirable benefits, like holidays, commuter benefits and stock options.
Whereas a company would pay a contractor an agreed-upon wage for their services but would not withhold or pay any taxes. A contractor is responsible for paying their own taxes, including federal income tax and self-employment tax. Additionally, they must pay for and obtain any benefits they want, including health insurance, independently.
Although 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 personal limited company or availing of a service for an umbrella company.
A limited company allows you to smooth your tax liabilities and allows 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. Plus you can also reduce your tax bill by claiming expenses incurred in your working life, but make sure these are legitimate business expenses.
Remember that 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.
Here is where you can unlock the real perks of working as an independent professional and where you’ll notice a huge difference between this and your more traditional working arrangement.
An employee works for one company and is therefore subject to the rules and obligations set forth by that company. A contractor, by contrast, has the choice to work for one or multiple organizations; in fact, it is common for contract workers to juggle several clients at one time.
For example, as a contractor, you can take time off whenever you feel like it, but remember you do this at the cost of not making money during that time, unless of course you are utilising a Personal Limited Company and have planned for this period.
Another key difference between working as an employee and as an independent contractor is job security. Coming from an employee's perspective this may be a possibility that you are not used to.
As a contractor, there are less strict notice periods for the termination of your contract as compared to termination of employment, 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.
These are all things you may notice as you transition from being an employee to becoming an independent contractor.
If you would like to know more about contracting, why not read some of our other blogs on contracting or check out our FAQ'S section on our website to answer some of the questions you may have.
At Icon Accounting, we are here to help ease the transition and help to make the move as easy as possible.
If you are an active Independent Professional and know someone who may like to hear more information about Contracting, make sure to talk to your account manager to avail of our referral programme!
For more information, reach out to us and chat with one of our team members by emailing email@example.com or by calling 01-8077106.