Hi folks!
In my last article, I wrote about the common types of IT contracts you might come across if you decide to become a contractor.
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I started contracting 11 months ago.
Just renewed my 12 month contract for another year.
I signed up with an accountancy company that assigns out an umbrella company to you.
You are the only employee in the company, but you don't pay the cost of incorporation. And you get lots of the tax benefits.
This is in Ireland. I'm not sure if other countries have this same setup.
I would only create my own company if I wanted to expense more items like conference trips, cars, etc as I am limited with what I can do with the umbrella company.
Interesting! I can see how that kind of setup might be an advantage. I bet the accountancy firm can handle the paper pretty easily for you too.
In Canada, you don't see that kind of relationship. There's no LLC in Canada either, so it's either stay as a sole proprietor or full blown incorporation. Either way, you can still expense out business related purchases.
That being said, they are really hammering down on the one-man corporations in Canada with stiff penalties to anyone who the government catches is doing 'employee' type work as a contractor....
I actually worked as a non-incorporated contractor for many years before incorporating. I incorporated when I started to get tired of being rejected by fintech organizations simply b/c I wasn't incorporated.
I did the incorporation myself, and it turns out it wasn't as difficult as the Canadian lawyer and accounting firms say it is....but I do get an accountant to complete my corporate taxes and required financial documents.
They do indeed! They handle everything and bug me for the information they need for Revenue.
They also bug me when I am not expensing enough stuff or taking advantage of tax saver schemes, which is pretty sweet.
The umbrella companies at my accountancy firm are all LLC's.
Large corporations seem to want that limited liability in case there are any issues during the contract.
What's the problem with this kind of relationship?
I understand for low paid workers it sucks as companies can take advantage of employees by not giving benefits, but for higher paid work the contractor is in the driving seat.
Is the government cracking down on contracting for the benefit of contractors or some other reason?
Where I work you can't really tell the difference between employees and contractors.
The main thing that employees get that contractors don't seem to be:
Incorporation is extremely easy in Ireland. My accountancy firm can actually do it for me if I want access to more tax breaks, but that seems like something that would make sense if you were on a very high rate of income.
You are correct!
It has to do with the government's bottom line more then anything. For years, the Cdn govt has been irked that one-man corporations were using the tax benefits for businesses, but they were really one-man corporations doing employee like work. For example, expensing business related purchases, tax breaks for small-businesses, etc
Basically, since most IT contractors do very similar work to their employee counter parts (not inc freelancers, they are OK), the government wants to tax them as employees. They've been picking on IT contractors since we're one of the largest groups of one-man corporations.
There are still advantages to incorporating, but us in Canada just have to keep track if we look too much like a employee. If we get caught, they apply pretty stiff penalties.
I actually look similar to my employee teammates where I work. I do weekend work too (but get paid for it at my hourly rate). B/c of my seniority on the team, I am expected to give coaching and mentoring (but I don't receive it) to juniors, but I too can bill that at a hourly rate (formal mentoring that is, I don't bill for watercooler talk :) )
Thanks for sharing and congrats on your contract renewal. 👍
Do you get to 'control' the umbrella company if you leave the accountancy? Seems like the accountancy owns it.
I've also never heard of this kind of setup before...some agencies sort of work like that when you're a employee of a agency but never heard where a individual umbrella corp is created just for you. It sounds like it takes off much of the burden for incorporating but still allows access to the orgs that only want to deal with incorporated contractors!
The accountancy firm owns & controls a bunch of umbrella companies.
When I leave I no longer have control of the company.
I work with a large multi-national fin-tech company, they will only sign a contract with a limited liability company, and not a person directly.
The accountancy firm deals with all things tax-related, and sort out even my personal taxes from things like Airbnb.
It's a pretty sweet deal as they often find ways of saving money that I didn't know about.
I thought about it, but contracting just isn't for me. I was definitely looking at incorporating according to whatever my tax attorney suggested. My anchor client ghosted me and I took that as a sign I am not yet ready to contract.
hey Scott,
Sorry to hear what happened. Losing existing clients definitely sucks (especially if you had a longer working relationship with them). On the other hand, it could also allow you to seek out different opportunities. What aspect of contracting makes you feel you are not ready?
More than anything else, it came down to finances. Running off on my own was sort of an impulsive decision after getting very dissatisfied and disillusioned with the practices of another firm I was working for; I wanted to do honest work and be able to pursue my responsibilities without constantly being micromanaged. I didn't have many savings built up, so I had nothing to carry me through until I found more clients. I also didn't have a portfolio published, kept finding better things to do besides make my website, spent very little time networking, and overall just didn't take things as seriously as I needed to.
If/when I get my finances together and have some money saved up, I'd love to try it again. I need to improve my focus (might be time to go back on ADD meds) and would probably want the guidance of a mentor before I attempted the process again.
Health is really important! Hope you get to try it again, Freelancing/contracting comes with a whole new set of challenges, but it might be worth it.
For me, I got tired of the unpaid overtime nonsense and started to feel used. I understand that deployments sometimes must happen on weekends to reduce business impact, but years of weekend work started to wear on me. I also felt I was dependent on my employer to provide a career path, but it didn't match what I wanted to do. So I decided to become a contractor, but I stayed at the my employer, just converted over to a contractor.