Being a Subcontractor – Things to Consider

Monday June 22, 2020, Posted By

There comes a time when ‘being an employee’ feels tedious and you realize you want a change. Though being an employee gives you a salary and financial security, there are times when you feel you want something more out of your life. Some people feel a stirring to go out and do something on their own, where they get to decide what work to take up and what they want to do.

If you are unhappy with being an employee and want to make it on your own and have a different life, it is time to do something about it. One of the options of starting out and doing things on your own is to become a subcontractor. First and foremost it is important to understand who a contractor is.

Who is a Contractor? 

A contractor is a self-employed person who takes up independent assignments or contracts for work and is responsible for paying their own tax and other expenses that come up during the course of work. Unlike employees contractors have the freedom to choose what work to do. Contractors can decide how many hours they want to work and choose which weekdays they will be available for clients. They can also work wherever they would like to work.

Time period of contracts and security

Contractors can receive work that takes a few weeks to complete and they can also get work that goes on for years. Once a contract is over, the contractor has to look for other work. Contractors have no job security or certainty of getting another contract when they need one. There can be unexpected breaks with no work therefore a contractor needs to be able to handle the stress involved with having gaps of time without work.

The contractor will need to plan ahead and seek fresh work before the contract expires so there is continuous income. They can also use this time to take a break whenever they want for a vacation or a trip, unlike employees. If their skill sets are in great demand, they can then plan a schedule and return to work after a holiday in peace. However, if work is lean, this can be cause for stress. It is advisable to save up to three months’ income and put it aside so that they can be used in case of unplanned breaks between contracts.

Working with different kinds of people 

An employee needs to get along only with those in their office or the normal course of their work. However, contractors need to be flexible and learn to work with different kinds of people who may have a different work culture. If you are a person who is able to adapt to new situations and get along with people easily, this would be suitable to you.

Agreements to be signed

A contractor has to have a “Contract for Services” with their client. It is advisable to have an employment agreement even if the work undertaken is short term. This is necessary as it specifies the terms and clearly states what you are agreeing to.

It is good for you to know what you are signing up for therefore, you would need to read the fine print and get good advice before you sign the document. Usually there are standard formats used for this. However, if it is good to read it so you know if anything has been changed or removed from the terms being agreed upon.  

Preparing for contingencies and paying taxes

A contractor doesn’t have the benefits that employees have such as paid sick leave, annual leave, pay for working on public holidays and superannuation contributions. As a contractor you will get paid only for the hours you work, therefore you will need to think ahead and keep money aside for expenses, contingencies and holidays.

While deciding your hourly rates, it is advisable to add around 4 to 5 days to cover any time you may fall sick and be unable to work. Include this in the budget to so that you are covered in case there are unexpected situations to deal with.

As contractors, the responsibility of paying tax and ACC rests on you alone. Neglecting tax matters could lead into a tricky situation where you will have to pay financial penalties. You will need to ensure that all your records are up to date and your taxes are paid on time.

Calculating your expenses

As a contractor you will need to consider all the expenses you need to incur before arriving at the rates you will charge for your work. While calculating the hourly rates, you need to take all your costs into consideration. You can work in a part of your expenses that are applicable to your work and claim them as tax expenses.

This could be a part (e.g.:10%) of your power bill, vehicle expenses, the rent, etc. It could even be the entire amount of something that is used solely for your work such as telephones and Internet. The cost of office supplies, furniture, tools and equipment bought only for work are to be added too. You would need to maintain timely records of all the claims you are making.

Fixing hourly rates for work 

An easy way to determine your hourly rate is to find out the going rate for the same work in a salaried job. Adding an additional 20% would help you cover expenses you have to incur such as days of sickness, annual leave, public holidays and ACC. For example if the salary based rate for the work you do is $50 per hour, add 20% to it, then your hourly rate would be $60 per hour.

You would need to be careful to charge a reasonable rate for your work as quoting high rates could cause you to lose future clients. On the other hand quoting low rates will make it difficult for you to meet your needs and could also lead to a perception of desperation or lower capability. If you are just starting out as a contractor, giving a discount in your rates would be helpful in gaining goodwill and building a good reputation.

Savings and retirement plans

Contractors are not automatically enrolled in KiwiSaver retirement savings schemes, therefore, planning for your retirement is your own responsibility. You would need to create your own plan and put money aside for it. It is wise to plan beforehand as it will help you save enough for your future.

If you are a contractor and need a loan, whether for a car or as a mortgage, it is tougher to get a loan from a bank. Getting a loan might require you to show a history of minimum two years of continuous work. Having buffer savings will help you keep paying your mortgage without a break even when your contract is over.  

Starting out as a contractor

Before you set out and begin working as a contractor it is advisable for you to meet a financial expert or talk to an accountant. You would want to consider the pros and cons or working under your own name, registering for GST, what records to keep and what expenses to claim. You will need to get a clear idea about how much you would need to aside for GST and income tax. Get briefings about how to pay taxes and the deadlines for it too.

Sole trader or company

A sole trader has a simpler set up and less ongoing costs. Less time is consumed in administration and paperwork. As a sole trader the liability is on you, if you face a problem during the course of work, it affects your personal life and matters. If you get sued due to liabilities or problems due to work you could lose your personal assets.

A company on the other hand is a lot more complex and expensive but you have more flexibility in terms of structuring and paying tax. When you run a company, your personal and business affairs are separate, therefore your personal assets are safe in case there is a financial problem or liability.

Are you ready to be a subcontractor?

After you consider all the factors you will be able to arrive at a final decision about being a contractor. As the saying goes ‘Forewarned is forearmed.’ Thinking things out will help you go forward in a focused and confident way. 

A word of advice, if you have decided to be a subcontractor, remember to keep time for record keeping and administration. Without records you will not receive your payments. Put aside the money to pay taxes and ACC from every invoice paid to you. Ensure you always pay your GST and income tax on time so you can avoid penalties. Send your invoice on time so you get your payments on time. Consult an expert to clear all your doubts. Ensure your hourly rate covers all your expenses and cost of living. Last but not least, ensure all your documents are kept safely and that you meet your deadlines.

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