Deciding to Become a Contractor or Sole Trader

A long time ago someone once said to me that there's a lot to be said for a steady salary - and that's right - trying to decide whether to give up your permanent job and take the plunge into the unpredictable world of contracting is not a decision you should take lightly.

It's funny though, because shortly after saying that to me, the chap in question gave up his permanent job and went on to become a very successful contractor (way back in 1987 he was earning £38 per hour working for a bank in the city of London - I think he made over £80,000 in his first year as a contractor!).

Still, what he said was true. I myself moved into contracting in 1992 and since then have worked for a variety of clients in a few countries. To-date (November 2013), contracting has been good to me, but I know that I have been lucky. In this article I'll explain some of the issues I have come across over the years whilst I have been working as an IT contractor.

Money

Yes, there's no point in dodging the issue, money is often a big incentive for someone to decide to become a contractor. As a contractor, you can typically earn twice as much as you would as an employee doing the same job, so it's no surprise that many contractors (or potential contractors) make the leap into the freelance world because of the extra money they can earn.

There is also the tax benefits of contracting. Depending on how you structure your business, it's not unusual for contractors to pick up around 80% of what their company invoices. This is considerably better than you would do as an employee, which is more in the 65-70% range. Of course, there is the big problem of IR35 (see below), which has been around since 2000. If you are caught by IR35, your percentage pickup will fall to more like 63%.

For me personally, money was never the main incentive. In fact, our family income dropped massively when I first became a contractor because my wife gave her job up, and she had been earning more than me. (My first contract was in The Netherlands, which is why my wife packed her job up.) I have never switched contracts for money so, no, money isn't my main reason for being a contractor.

IR35

Anyone who has had any involvement with the contracting/freelancing world since 2000 will have come across IR35. I'm not going to spend any time explaining what IR35 is as there are loads of articles and resources on the web that flog it to death. What I will say though, is that as a contractor it is always there, in the shadows so to speak. Because IR35 is such a grey area, it is very difficult to say with any real certainty whether someone is caught by the legislation or not. One of the consequences of IR35 though is the huge industry that has grown up around it. Organisations like the Professional Contractors Group (PGC) and many other companies exist or have at least profited financially because of IR35's existence. I'll leave it up to you to decide whether you think these companies/organisations really do want to see the back of IR35.

Before you decide to become a contractor think long and hard about IR35. If you decide to go down the contracting road, IR35 will become a big part of your life, and you need to be able to sleep at night.

Are You Healthly?

This might seem like a strange thing to ask, but it is something that you should ask yourself, and answer truthfully. As a contractor you only get paid when you are working; if you are ill and you have to take time off work you will not get paid. Now, if you consider an average working month as being 20 days, then if you are ill for one day, that's a 5% reduction in that month's revenue; two days would be 10%, and so on. So, if you are a person who takes a day off work everytime you sneeze or cough, maybe contracting isn't for you.

The Job Market

We all know that the job market fluctuates and that this can have an impact on permanent employees as well as contractors. What you do need to remember though is that it is very easy for companies to offload contractors whereas it is normally a lot more time-consuming and costly to get rid of permanent staff. After all, this is one of the reasons why companies use contractors - so that they can get rid of them when work is thin on the ground. What this does mean though in reality is that you can be out of work without receiving much notice. If you're a permie with a three month notice period then you've got plenty of time to find something else before you're out of work; if you're a contractor with a one week notice period then it's a different ball game.

Rate Cuts

In the early 2000s, some bright spark at a bank decided that a good way to save the bank some money would be to cut contractors' rates. Afterall, contractors don't have a union and as such have no power when it comes to standing up to their clients. This practice soon spread across many business sectors and these days, cutting contractor rates has become fairly common. I myself had to endure a rate cut in 2001, plus two other potential rate cuts in later years. Recovering financially from a 10%-15% rate cut can take a long time: if a company gives you a rate cut this year, it's very unlikely they will reverse it the following year. In reality, a 10% rate cut can set you back three or four years unless you switch contracts to get a better rate.

No Redundancy, Holiday Pay, or Sickness Pay

I mentioned above about the importance of being healthy when you are a contractor, but in addition to this you need to remember that you won't be paid when you take holidays, and if you lose your contract there won't be any redundancy pay. So make sure that you put some of your hard earned money in the building society for a rainy day!

The Need to Carry Out Monthly Accounting / Bookkeeping Tasks

If you become a contractor or a sole trader, you'll have to accept that it will be necessary to carry out monthly accounting / bookkeeping tasks. I'm not sure, but I think it is a legal requirement that you do this. You'll need to record your company's sales, expenses, and so on. The obvious solution to this burden is to get yourself some good, cheap, accounting / bookkeeping software such as MyBookkeepingManager that will make life a lot easier for you.

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