Contractor vs employee: which is the best way to go?
- Financial Planning
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There are about 1 million people in Australia who work as independent contractors, which represents around 9 per cent of all employed persons – and over half of them are aged 45 years or over1. Some of this growth has emerged from the shift in careers toward service industries, but it also represents a shift in the way people are structuring their working life.
So what makes it so popular and how does it compare financially to working as an employee? Here are some of the issues to consider – take your thoughts to a financial professional to discuss the best choice for you and your life.
Higher remuneration vs employee entitlements
One of the most significant differences between an employee and contractor is, of course, the way they are paid. Employees enjoy a range of entitlements over and above their base salary, such as holiday leave, sick leave and superannuation, while contractors must look after these issues for themselves.
On the other side of the ledger, contractors generally earn a higher amount per hour of their working time, which gives them potential to earn more. While the cost of providing their own holidays, sick leave and super needs to be funded from that higher income, contractors will often still come out with a higher net result.
Contractors also have the ability to offer their services through a company or trust structure, which can glean tax benefits that are not available to permanent employees.
Another big attraction of contracting is the flexibility to arrange working hours around your family and social life. This can result in a better work/life balance, including the ability to choose holiday times, rather than being tied to the restrictions that an employer may place. For some contractors this can be an even bigger attraction than the financial benefits, as it goes to the heart of quality of life.
The flip side is the lack of continuity of employment. For example, you may be in an industry that typically engages contractors on projects that may only last a few months, which means you need to always be considering where your next contracting job will be coming from.
Employees generally have the benefit of job security and may be happy to sacrifice flexibility for the peace of mind of not having to continually market their skills and services.
Another benefit that contractors gain from working for multiple businesses is the breadth and diversity of experience they pick up along the way. This can enhance their skillset, which in turn can make them more desirable to prospective employers and can enable them to charge a premium on their services.
Many people who work as permanent employees enjoy the security and familiarity of working for the same employer for an extended period. Contracting, however, has an appeal to those personality types that like new challenges and are stimulated by meeting new people and experiencing different working environments. Contractors can also broaden their professional networks more readily through the inherent mobility of the contracting life.
In some industries and professions, contracting may also open up opportunities to work in different areas of the country or even overseas, which may be ideal for those who do not want to settle in one place.
The importance of being organised
While contracting presents benefits in income, work/life flexibility, professional development and job satisfaction, it does require more organisation in order to stay on top of business administration and financial matters.
Without sick leave, for example, it is imperative that contractors organise a sound income protection plan that gives them a safety net if sickness or accident strikes. Similarly, their superannuation tab is not picked up by anyone else, so they need to ensure that they provide for themselves in terms of their retirement security.
This is why you might need services such as an accountant and financial planner to help map out a long-term strategy for financial security and to set up the systems and habits to put that strategy into action.
Reference: 1 Australian Bureau of Statistics: Characteristics of Employment, Australia, August 2016.
Thinking of working as a contractor? Share your experience on the benefits and challenges.