5 Pros & Cons to consider for the Self Employed ContractorLast Updated: May 1, 2020
Becoming a self employed contractor has numerous benefits over traditional employer-employee arrangements. However, there are just as many advantages to traditional full-time jobs that should be considered carefully by anyone preparing to make such a move.
IN RECENT years, there has been a significant increase in numbers of people who choose to abandon traditional employment in favour of taking the reins of their own destiny to become a self employed contractor.
While this is an attractive option with the most immediate benefit of enabling greater control, and access to opportunities that might not have been imaginable in the standard employer/employee working arrangement.
But could it be that simple? Is it wise to walk out on a full-time job and become a self employed contractor simply because you want to pursue your dream as a free agent; or are you, as the saying goes, throwing the baby out with the bathwater?
Traditional Employee vs Self Employed Contractor: 5 Things to Consider
While there are indeed a number of benefits to becoming a self-employed contractor, versus sticking with a traditional ‘job’, it’s not without a set of distinctive drawbacks and pitfalls. It’s a tough situation, not for the faint-hearted. The pay-offs can be huge, but being a self employed contractor calls for massive reserves of energy and dedication. Here are the top 5 things that any employee should consider carefully before pulling the ripcord…
1. Flexibility vs Security
As a self employed contractor, you are your own boss. You get to control the hours that you work, the locations where you work, and you alone are in control of your career progression and development. The arrangement is simple but effective: the more efficiently you manage your workload, and the better you perform your tasks, the more likely you are to profit.
On the flipside, as a self employed contractor, you forfeit the rights to protection from employment laws that employers are obliged to comply with. For example, when work dries up, contractors are first to lose out, because employees are guaranteed certain protections by law. Self-employed contractors are not entitled to any redundancy payments.
2. Contractor Rate vs Salary
The financial incentive for becoming a self-employed contractor is compelling. Contractors tend to get increased rates for performing the same job that employees would do, due to the fact that employer does not have to account for holiday pay, sick leave or employers’ taxes.
This must be balanced against regularity. As a salaried employee, you are assigned a payment date, usually every month, and are pretty much guaranteed that the salary due will be paid into your bank account on that date. Self-employed contractors, on the other hand, are treated in the same way as any supplier. Therefore, you must work harder to ensure payment for work undertaken, and difficulties in getting paid on time can lead to cash flow problems.
3. Travel vs Home
The world of contracting can create enormous opportunities to see more of the world than you would do as a typical employee of a company. Travel can be lucrative too. Countries with skill shortages tend to offer generous short- to medium-term contracts.
However, travelling tends to suit only in circumstances that do not include family and other significant personal commitments. As a contractor, if work becomes scarce in your particular sector close to home, then you may actually be forced to travel further away from home than you would prefer.
4. Social Welfare
Situations will vary from State to State, but in Ireland, every employee’s statutory social welfare contributions are deducted from salary and paid over to the Revenue Commissioners by their employer. These contributions entitle the employee to a raft of benefits under the social welfare system if and when required, e.g., in the event of long-term illness or unemployment.
Self-employed contractors pay their own contributions that to a scheme that does not provide the same level of benefits as employees are entitled to, such as jobseeker’s benefit, disability benefits, and others. While the specific arrangements will differ from country to country, it’s an issue—what happens in the event of illness or unemployment—that should be given the most serious consideration.
5. Deducted Taxes vs Self-Administration
Also in Ireland, employees’ taxes are deducted from salary at source by the employer and paid over to the Revenue Commissioners. The employee has only minimal (if any) obligation to file tax returns and shoulder other administrative burdens, and does not have the worry of incurring additional costs for preparing annual accounts.
Self-employed contractors, on the other hand, must register for income tax at the very least, and potentially VAT, payroll taxes, relevant contracts tax, and other. All of this administration must be submitted periodically, with fines and penalties applied in the event of missing a deadline or filing incorrect returns. If you decide to trade through a Limited Company you must also make an annual return to the Companies Registration Office and comply with extensive company legislation.
In recent years in Ireland, the Revenue Commissioners have been active in investigating contractors, as historically, many contractors operated while their tax affairs were not in order, due largely to lack of knowledge and poor advice.
Again, the specific arrangements will vary from country to country but weighing up the pros and cons of employer-paid tax on the one hand, and time-consuming administration on the other, is an essential step to take if you are considering breaking out as a self-employed contractor.
However, the positive news in the modern era is that the area of tax and accounting should not provide a burden for anyone, once you have an accountant on your side who knows your industry or sector, and can guide you past the many hurdles that you may face as a contractor.