Guide to Contracting
Welcome to the world of IT contracting. Ever since the pioneering days of computing in the 50’s and 60’s, there has been a shortage of suitably qualified computer professionals. Almost every company experiencing a fluctuating demand for IT expertise, uses contractors. This fluctuating demand may be caused by the implementation of new facilities, conversions and one off projects, or there may be a requirement to buy in specialised knowledge. Contractors are considered by many organisations to be the most cost effective option. Employing permanent staff involves training and the need to find further work after the project is finished.
What is a Contractor?
A Contractor is an individual who enters into a contract for service with a third party either on his/her own or as an employee of a company, to assist in the completion of a project.
Contractors are highly qualified, highly paid individuals. They often have obtained additional schooling and technical training in their field. They are, therefore, very qualified to handle most jobs in their specific discipline and thus may earn more than permanent staff for their work.
Typically, the average length of a contract assignment is from six to nine months. Many last longer; some are also shorter. Once an assignment is completed, the contractor moves on to other projects or to another employer.
Choosing Between Contract and Permanent Work
Before embarking on a contracting career it is essential to weigh up the pros and cons of contracting, from a marketing and business perspective.
Advantages of Contracting
- More money – Due to the short-term nature of the work, most companies will pay substantially higher rates.
- Tax Efficient – Contract work can be more tax efficient than salaried employment assuming organised tax planning through the contractor’s business.
- Experience – Contractors are generally more marketable due to their exposure to a wide variety of systems and organisations.
- Self-Training – Contractors can chose their own form of training and hence keep abreast of leading technology.
- Flexibility – Contractors can change positions on a regular basis. The more flexible your attitude towards location and type of work, the easier it will be to find interesting contracts and continuity of work.
- Independence – A contractor is his or her own boss.
- Company Politics – Contractors usually do not get involved.
- Holidays – With no fixed dates for holidays, contractors can take extended holidays between contracts.
- Travel – Experienced contractors can market themselves worldwide and take up short-term contracts anywhere.
- Social – Contractors meet all sorts of new people on different assignments.
Disadvantages of Contracting
- Tax – Contractors are responsible for all tax payments, and must pay on time or face interest and penalties.
- Paperwork – Contractors must keep records of all transactions so they can prepare Income Tax and GST returns.
- Training – There is usually no in-house training provided to contractors.
- Involvement – A contractor is not usually involved in management decisions.
- Adaptable – Contractors must be very adaptable to changing environments.
- Insecurity – Contracts are for specific periods of time and tend to range from 3 months to 1 year.
- Social Welfare – Contractors do not receive pay-related social insurance payments such as sick pay or unemployment benefits.
- Holiday pay – Contractors receive no remuneration for holiday periods.
- Legislation – Contractors are not protected by current legislation offering certain rights to employees.
- Accountants – In most cases, it is advisable to appoint an accountant who will charge you for their services.
It is important to give contracting some serious thought, don’t just rush in, as it is not for everyone. Do your research and talk to your recruitment consultant to see if it’s right for you. Some points to consider are:
- Have I sufficient technical skills and experience?
- Have I sufficient business experience?
- Can I live with the insecurity of the contract market?
- Am I financially secure – to get through the down time between contracts?
- Do I have the right personality to adapt to constant change, the ability to fit into new teams and to accommodate a constant stream of new projects? Contractors
need to be energetic, enthusiastic, positive, adaptable, self-starters, have good
communication skills, and are able to hit the ground running?
Setting up as a Contractor
Once you have made the decision to go contracting, you are essentially setting up your own business and you must decide which entity to trade under. Most contractors opt for either Sole Trader status or form their own Limited Company. There are currently very few tax advantages to a contractor forming their own company in New Zealand. However ones circumstances vary greatly so it is advantageous to seek professional advice on the right set up for your business.
- Sole Trader
- Limited Company
A sole trader is a person trading on their own. The business is controlled, managed and owned by that person. A sole trader is personally entitled to all the profits, but is also personally liable for all business taxes and debts. Usually a sole trader can begin the business without following any formal or legal processes to establish it.
A company exists as a formal and legal entity in its own right that is separate from its owners/shareholders. A company must be set up and registered with the Companies Registration office. You can set up a limited liability company in two ways:
- Online at www.companies.govt.nz The fees are $10 for name reservation and $50 for company incorporation payable by visa or MasterCard or by setting up a direct debit account. To reserve your company name on-line, click on document registration/name reservation.
- By filing paper forms and posting them to the National Processing Centre, Private Bag 92061, Auckland Mail Centre. The fee to file paper forms is $25.00 for name reservation and $100.00 for incorporation.
The company owns the business’s assets and liabilities and is responsible for its debts. A shareholder’s liability for losses is limited to their share of the ownership in the company. Companies must file annual returns with the Companies Office
You’ll need to apply for an IRD number if you don’t already have one. The IRD number is an eight or nine-digit number and each taxpayer has their own. If you are a sole trader, use your personal IRD number. If you are a limited company you will need another IRD number for the company. This number will also be used for GST (Goods and Services Tax).
Registering for GST (Goods & Services Tax)
Contractors working in New Zealand who expect to earn more than $40,000 per annum must register for GST. The benefit of registration is that businesses can claim back from the Tax Department, the GST paid on purchases of goods and services used in the business.
A registered person must account for all their own GST, complete GST returns and keep tax invoices. You must file GST returns with the Inland Revenue. When you register for GST, the Inland Revenue will send you out a booklet outlining what you must do.
Insurance is a very important consideration for any contractor. You’re suddenly your own boss and be it on your head should anything go wrong. What if you make an error in that mission critical program, or the company goes bust because you are not able to develop the system you promised? Or what if you become ill, you’re not entitled to sick leave or sick pay. Health insurance and indemnity insurance are two of the main types of insurance cover that contractors should consider taking out. We recommend you talk more to an insurance broker about the best options for you.
For more information on contracting contact a De Winter consultant at: