Moving from employee to IT daily rate contract

I have been doing a lot of work over the last few months with clients who are moving from employee positions to IT daily rate contract. Good IT consultants are worth their weight in gold with daily rate contracts ranging from €500 – €800 per day for those with high levels of expertise. Most contractors I speak to have to turn off their phone during the day because they are getting calls from agencies offering them work!

Moving from being an employee to an IT daily rate contractor involves very little cost. You don’t have to pay for any office space, insurance or other business running costs. You even have your laptop provided for you! There are some things that you need to do when you make that change.

Set up a limited company or be self employed?

It costs a few hundred euro to set up a company and it is easy to do…you hire a secretarial company to take care of all the paperwork for you. in fact, most hiring companies will only deal with contractors who have limited companies, so you are restricting your opportunities by being self employed.

If you set up a limited company, the money you earn is paid into the company account. You then draw down the salary you want and pay income tax on the money taken from the company.

If you are self employed, the money is paid directly into your personal bank account and you pay income tax on all of it.

Get an accountant

Your first cost to working for yourself.  If you are self employed, you need to do a tax return each year. If you set up a limited company, as well as your own tax returns, your company needs to submit annual returns also.

It is a fairly straightforward job for an accountant to do for you once a year.

Loss of entitlements

Employees are entitled to unemployment and sickness benefit. When you work for yourself, you don’t get any of those entitlements from the State. For my daily rate clients, I tell them their second ongoing cost is an income protection plan to ensure they continue to receive an income if they are sick and can’t work.

Pension

When it comes to making pension contributions, there is a big difference between whether you are self employed or a limited company.

• The maximum amount you can contribute to a pension for the self employed (personal pension) is a lot lower than that to a company paid pension.
• You are liable to PRSI & USC on the contributions to a personal pension plan but not to a company paid pension.
• You may be able to access your company paid pension from age 50 onwards. For personal pensions, the earliest you can access them from is age 60.

Example

You are a 35 year old on daily rate and will earn €100,000 in the year.

1. Self employed option – You can contribute 20% of income to a pension ie €20,000. You are also liable to PRSI & USC on that €20,000 ie €2,400
2. Company paid option – You can contribute up to 63% of income to a pension ie €63,000. You can just draw down an income of €80,000 and the company pays €20,000 to a pension on your behalf. You automatically save €2,400 in unpaid PRSI & USC.

When moving to daily rate, the biggest decision is whether to set up a company to receive your income. The majority of my clients have set up this structure as they have more control as to the amount they take as income and pay income tax on.

If you have any questions, please contact me directly at steven@bluewaterfp.ie