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Considerations when moving from Employee to IT Contractor
Date: Thursday 7 September 2023
If you are considering making the move from Permanent employment to becoming a self-employed IT contractor there are some practical and some “mindset” points to consider.
Before you decide to switch it is good to understand your own reasons for wanting to switch and do a sanity check on your decision.
Are your skills relevant?
- 1. Is there an established market for what you do?
- 2. Have you researched your role and the industry in advance?
- 3. Have you assessed the risks around your finances, could you pay your bills and Mortgage/Rent if you are between contracts for a few weeks or months?
- 4. Have you built your network of contacts?
- -The better contacts you have with recruiters and other contractors the better.
- 5. Established a relationship or selected a contact accountancy firm?
If after these checks you do decide to make the move, here are some of the practical considerations to consider.
Umbrella versus other company structures
Typically, IT contractors will set up their self-employed structure in one of two ways. A Limited Liability Company or an umbrella company. There are other company structures such as Partnerships and Sole Traders and variations on each but by far the most used are Personal Limited and Umbrella companies.
If you set up your business as a Limited Company, you and your business are seen as separate entities. This means that if the company gets into debt, the creditors only have a claim on the assets of the company (not your personal assets). Most Contractual agreements will insist on a Limited company rather than a Sole Trader for liability reasons.
The other option is to use a contracting accountancy service to avail of what is called an “Umbrella company”. This is an intermediary company structure managed by the accountancy firm. They are responsible for invoicing the client, deducting taxes, and managing your business expenses and end-of-year tax return on your behalf. All payments are processed via the PAYE system with deductions of tax, PRSI, and USC to ensure you're fully compliant.
This is a popular choice for first-time contractors as there is little administrative overhead in setting it up. Several firms in Ireland specialise in this area, but they have differing fee structures so you should undertake a thorough comparison to choose the best one for your needs.
If you are moving from permanent employment some differences to be aware of are;
Payment & Invoicing
You will need to invoice either directly or through your Accountancy firm to get paid. This will often involve a weekly or monthly timesheet to account for your time. Typically approved by a manager.
Pay schedules can differ from 1 week to one month. If it’s your first contract and you have a 30-day payment term you could be waiting 60 days from your last payment as a permanent employee to your first payment as a contractor. Make sure you read the payment terms and negotiate a shorter term at least for the first couple of invoices.
The end date on the contract is your last day. The notice period on the contract only applies if an early end to the contract applies. Make sure you know your notice period and start to ask about contract extensions about 6 weeks in advance of the end date. It is normal to know circa 4 weeks in advance, so no news is not good news in this instance, it’s time to start lining up your next contract.
You may be used to getting paid for your days off. As an IT contractor, you will only be paid for the days you work. You should factor this into your calculations. A working year is typically calculated as 240 per year.
As a contractor, you will fall outside legal protective notice, Redundancy and the unfair Dismissal Act will not apply to you as a contractor.
During your first contract
Remember that your current contract is what you will rely on to secure your next one. It is critical to fulfil your job requirements and deliver on these. This isn’t specific to being an IT contractor obviously, but you should always aim to maintain a good reputation and relationship with the hiring managers. Most recruiters will do their best to place you in concurrent contracts so developing these relationships is also important to continued success.
Ideally, you will have your next role lined up before you move between contracts. As discussed in the Notice Periods section earlier, if you know your contract is ending it is to put the effort in to minimise the ‘in-between’ contracts time.
There are many benefits of being a self-employed IT contractor. It is generally better paid than a permanent employee, there is an in-built work-life balance as you will not be doing any unpaid overtime to progress your career. The experience can be more varied with exposure to interesting projects and diverse sectors. When you gain experience, you can build in breaks between jobs or look for international work.
See our list of available contracts to start your contracting life today!