Are you really better off being an IT Contractor – A Financial Assessment

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Better Off as an IT Contractor
Better Off as an IT Contractor or not

Better Off

A reader posted this article about being better off or not as an IT Contractor as Comments after one of our articles.

Employing Permanent Staff

As a rule of thumb, when I was employing perm staff, I would estimate their cost to be twice their salary.

Success as an IT Contractor
Success as an IT Contractor

This is because they pay perm staff for holidays, bank holidays, sickness and other types of leave. They often have a pension, health and life insurance.

Also, they require training, expect to attend conferences and trade meetings. They would possibly have company phones, cars and other ‘benefits‘. Also, they would have a team of people in HR, accounts and other functions looking after their every need, right down to providing paper for the photocopier or ensuring their laptop is ‘refreshed‘ every few years, software for it is licensed and if it breaks, someone will sort out a replacement and recovering their data for them.

Contractor Business

In contrast, the revenue a Freelance‘s ‘business’ brings in must pay for all these ‘unseen‘ elements of perm employment. In addition the revenue must also cover Employer‘s NIC, numerous forms of business insurance, payroll, accounting and legal expenses and a host of other costs hidden to anyone who has never run a business.

For this reason, a rule of thumb would be that a Contractor‘s income is about half ‘Day Rate * Number of Days‘. It’s the inverse of the perm employee. A perm costs ‘around‘ 2x their salary and a Contractor earns ‘around‘ half of their revenue.

No Redundancy Cushion

In addition of course, a Contractor has no redundancy cushion and not even a right to unemployment benefit if they can get no work. They are always employed by their company.

Contractors who make money
Contractors who make money and those who don’t

The fact the Company might have no revenue from which to pay them, is immaterial.

A Contractor also has to fix their own laptop and pay for their own software. They take unpaid time if equipment or other problems mean they can‘t work. Plus they have to keep Company records to HMRC standards and take further time for VAT, PAYE and other compliance checks.

Also, the Contractor probably finishes on a Friday only to start again, this time on company admin – invoices, PAYE, VAT, the list goes on.

So not only is the Contractor receiving only about half ‘their rate‘, they are having to do a good deal more work to get it than simply complete their contracted work. Not such a rosy picture now, is it?

Better Off Contractors

I‘m afraid comments like ‘Ungrateful parasite’ sound nothing more than sour grapes. They are based on the inaccurate assumption that someone is being paid more than them.

I wonder if these people feel the same towards perm colleagues who they believe earn more than them?

Getting Rich from Agency Insolvency
Getting Rich from IT Contracting

It all reminds me of being on a train and two ‘gentlemen‘, sat in First Class at their employer‘s expense as if to reinforce my previous points, moaning to each other about how much IT contractors at their place were paid and ‘how they could do the same.‘

I was really tempted to lean over to them and suggest to them that if they believed this to be the case, then why didn‘t they go and do the same?

Maybe I should have.

So, are you really better off as an IT Contractor?

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Comments

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2 COMMENTS

  1. Around 2 hours a month max on accountancy, vat, banking admin tasks with my £960p.a. accountants and their excellent online tool.

    Exclusively using the clients’ on-site IT, software etc – not really needing to maintain any of my own.

    Assumption of working 9 or 10 months of the year, based on gaps between contracts and any sickness time off or chosen training.

    I don’t see the reality quite as bad as was painted above, but I think both sides are overstating – I think contracting IS better financially (for limited extra admin, but more risk to cope with), just not by the golden masses of money that some permies perceive it as.

  2. In 2016 your only better off as a contractor if your earning above £350-400 a day & can bill for 260 days a year. Otherwise go back to a perm career. This is because so much competition for premium roles & bench warming is a stark reality for most contractors unless you have in demand rare skillset’s.

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