Great article. I asked an accountant recently and was suggested not to be a contractor! I said that this won't work, then the suggestion is to admit to be a PSB directly to avoid the risk... I am quite disappointed by this system, since it's the truth that we are on ourselves and take all the risks normal employees own't. Your article just showed me some more specific info on this issue for software developers.
Since the nature of contracted developers looks like employees a lot, I guess that a safe strategy is to apply your advice of 'Minimize the profit of your corporation by expensing most of your company revenue as your salary' while deducing some expenses and keep some profit (like a portfolio in terms of investment)? In this way, even if the company is regarded as PSB eventually, the penalty (I suppose that it's based on company's profit?) will not be so big and can be affordable.
BTW, I also thought of the idea of doing some small side projects, but the accountant said that the revenue of these are too small comparing with your main payer, so it won't help...
hi Idog
Sorry for the late reply. I just wanted to share some of the things I've researched and forward the information I've gotten from accountants.
Technically speaking, not all penalties are prorated to how much profit a company makes (i.e. a company can get penalized for x amount regardless of their net profit/loss). That being said, even as a PSB, you can write off salary as an expense. Since most developers have low operating costs, if you write off most of your income as salary, then the amount of bad-business deductions you can get penalized for is low.
Though I have heard similar concerns regarding side projects, I'll share with you what I've been told. You have to show that you are 'putting in effort' in obtaining additional clients. It is very normal for legit freelancers to have 1 or 2 major anchor clients and a number of other small clients. The income distribution between their anchor clients and 90% of the rest can be quite significant- but they are still non-PSB. It comes down to how you operate and carry out business.
As a contractor I know what you might be going though. Many companies require contractors to become incorporated. If your operating costs are low you can take your accountants advice and declare that income as coming from PSB sources. There might not be a significant difference in your take home pay.
Different accountants and lawyers have different perspectives on the subject - but many have their own agenda as well when they recommend different things. In the end, it comes down to the nature of your business and risk tolerance.
If it's your first year as contracting, it is very common for freelancers to have just one client - so the risks of having your corporation be tagged as a PSB is low...unless you have unusual expenses.....
Thanks for the information. Till now I've been a freelance developer for more than 1 year, and things have been more clear for me.
As you said, one accountant also expressed the same thing, for example, you need to show that you've been looking for new clients actively, and you can also do some side project, even it is as small as fixing a PC for a friend...
I'd say that this rule itself is not very fare for software developers. For other jobs like plumber, one will have a lot of clients by nature. But for developers, usually one takes a big project, that requires one to sit in client's office working together with other developers or contractors. In this case, it's difficult to keep another major client, unless one finishes one project and goes into another one.
But I will keep doing this anyway, as it gives one a lot of freedom at work (for example, you don't need to attend most of the meetings, and also don't need to consider most of things other than the work itself). I had been working as permanent employees all the time until I started this contract job. I found that I could hardly work in one job for more than 2 years for various reasons, and this new style suits me quite well :-)
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Great article. I asked an accountant recently and was suggested not to be a contractor! I said that this won't work, then the suggestion is to admit to be a PSB directly to avoid the risk... I am quite disappointed by this system, since it's the truth that we are on ourselves and take all the risks normal employees own't. Your article just showed me some more specific info on this issue for software developers.
Since the nature of contracted developers looks like employees a lot, I guess that a safe strategy is to apply your advice of 'Minimize the profit of your corporation by expensing most of your company revenue as your salary' while deducing some expenses and keep some profit (like a portfolio in terms of investment)? In this way, even if the company is regarded as PSB eventually, the penalty (I suppose that it's based on company's profit?) will not be so big and can be affordable.
BTW, I also thought of the idea of doing some small side projects, but the accountant said that the revenue of these are too small comparing with your main payer, so it won't help...
hi Idog
Sorry for the late reply. I just wanted to share some of the things I've researched and forward the information I've gotten from accountants.
Technically speaking, not all penalties are prorated to how much profit a company makes (i.e. a company can get penalized for x amount regardless of their net profit/loss). That being said, even as a PSB, you can write off salary as an expense. Since most developers have low operating costs, if you write off most of your income as salary, then the amount of bad-business deductions you can get penalized for is low.
Though I have heard similar concerns regarding side projects, I'll share with you what I've been told. You have to show that you are 'putting in effort' in obtaining additional clients. It is very normal for legit freelancers to have 1 or 2 major anchor clients and a number of other small clients. The income distribution between their anchor clients and 90% of the rest can be quite significant- but they are still non-PSB. It comes down to how you operate and carry out business.
As a contractor I know what you might be going though. Many companies require contractors to become incorporated. If your operating costs are low you can take your accountants advice and declare that income as coming from PSB sources. There might not be a significant difference in your take home pay.
Different accountants and lawyers have different perspectives on the subject - but many have their own agenda as well when they recommend different things. In the end, it comes down to the nature of your business and risk tolerance.
If it's your first year as contracting, it is very common for freelancers to have just one client - so the risks of having your corporation be tagged as a PSB is low...unless you have unusual expenses.....
Hi Jay,
Thanks for the information. Till now I've been a freelance developer for more than 1 year, and things have been more clear for me.
As you said, one accountant also expressed the same thing, for example, you need to show that you've been looking for new clients actively, and you can also do some side project, even it is as small as fixing a PC for a friend...
I'd say that this rule itself is not very fare for software developers. For other jobs like plumber, one will have a lot of clients by nature. But for developers, usually one takes a big project, that requires one to sit in client's office working together with other developers or contractors. In this case, it's difficult to keep another major client, unless one finishes one project and goes into another one.
But I will keep doing this anyway, as it gives one a lot of freedom at work (for example, you don't need to attend most of the meetings, and also don't need to consider most of things other than the work itself). I had been working as permanent employees all the time until I started this contract job. I found that I could hardly work in one job for more than 2 years for various reasons, and this new style suits me quite well :-)