How to Become a Contractor – Key Questions Asked
Have you been with the same company for too long? Are you ready to experience a change of pace which places your career firmly into your hands?
Contracting offers opportunities aplenty for career progression, flexibility, and valuable insights into companies, and industries you might never have experienced before. And most importantly, this area of work offers generous financial rewards.
You may hear often, ‘But I won’t have any job security or benefits if I choose to contract.’ It doesn’t have to mean flying solo or a lack of social welfare benefits. There are multiple options available when contracting – it’s just a matter of finding the right solution for you.
In this three-part series, itContracting presents the first instalment of ‘How to Become a Contractor – Key Questions Asked’. To explain each step of the journey, Operations Director of Icon Accounting, Claire Fagan has answered the most frequently asked questions when considering contracting for the first time.
How to become a contractor…
Firstly, to set up as a contractor, a Limited Company structure is required. A LTD company structure can take the form of an Umbrella Company or your own Personal Limited Company. Most, if not all IT contractors set up a Limited Company, rather than set up as a sole-trader. This is because the IT agency will be responsible for certain employment rights, as a sole-trader will be considered an employee.
What is a Personal Limited Company?
A Personal Limited Company is your own LTD Company, whereby you select the company name, the Directors and shareholders of the company.
It is important to note that a Personal Limited Company is typically more expensive than setting up under an Umbrella Company. However, the benefits of operating under a Personal Limited Company can work for long-term contractors.
What is an Umbrella Company?
To put simply, an Umbrella Company is a Limited Company that manages all invoicing, payments, taxes and compliance on behalf of a contractor. An Umbrella Company is often the preferred way to set up for first-time contractors, as it is a less expensive option than setting up a Personal Limited Company.
The Umbrella Company manages the full setup for a contractor, ensuring all compliance and invoicing requirements are meet, alongside managing all payroll, business expense claims and tax affairs. Under an Umbrella Company, there is an option to operate under a PAYE Umbrella Company or a Director Umbrella Company.
A PAYE Umbrella Company is a limited company which allows contractors to maintain Class A PRSI contributions while on contract, plus taking advantage of all the benefits contracting brings.
The Director Umbrella Company enables contractors to become a Director of a Limited Company without any of the costs involved in setting up a Personal Limited Company. As a proprietary Director of the Umbrella Company, contractors have a self-employed status where they pay the lower rate of PRSI (Class S) 4% and do not need to pay the employers portion of PRSI.
Why do I need a company to become a contractor?
There must be an agreement in place between two companies to issue a contract for professional and/or consultancy services (e.g. your work).
A contract is then drawn up between your Umbrella Company/Personal Limited Company and your IT recruitment agency, such as itContracting for the supply of services. It is your Umbrella Company/Personal Limited Company that must raise an invoice to the agency to request payment.
As a contractor, a gross payment is made to the bank account of the Umbrella Company/Personal Limited Company. It is the responsibility of each contractor to manage their own taxes. However, if you’ve set up an Umbrella Company, that responsibility becomes the responsibility of the Umbrella Company provider.
For that reason, it is imperative to engage in services of a reputable and compliant Umbrella Company provider.
What option is best for me?
There are many factors to consider when deciding to operate under an Umbrella Company or a Personal Limited Company, but the main areas include:
– Duration of Contract
– Daily Rate
– Social Welfare Contributions
To fully assess what option is best for you, it is recommended to speak with an accountancy provider specialising in Umbrella Company/Personal Limited Company solutions.
For more information, visit Icon Accounting today.