Moving to contracting requires careful planning

As many of us ponder quitting our day jobs amidst the global shift from full-time work post-Covid, a growing number of workers are turning to what they see as a more palatable option – independent contracting, usually on an hourly rate.

But taking the plunge and leaving the relative security of your regular job could have its financial pitfalls and you’ll need to take several things into account before making such an important and potentially life-changing decision.

 

Pros and cons abound

At first glance, the rates you can charge as a contractor relative to your current salary can appear to be much higher, while you also get to be your own boss, of sorts, while enjoying the relative freedom of not being tied down to one company for a certain number of years of your life.

However, there are plenty of pitfalls you may have already considered but need rehashing anyway.

For starters, if you’re embarking as a first-time contractor there are limits to the rates you can charge unless you’re in a highly specialised and much sought-after field of work, with the right skills and relevant experience. Your initial rates will also be relative to the level of demand in the marketplace and the amount of competition that already exists for your services. Additionally, as a newbie you may have to be willing to accept a discounted rate relative to your peers if you want to establish a good reputation and build a business, especially if you’re competing with other contractors who’ve been around for decades.

You’ll then need to consider the length of the contracts you are signing and how long you could potentially be between contracts due to factors that may be out of your control such as a general economic downturn. Depending on the nature of your work, contractors are often the first thing organisations dispense with when they feel the pinch financially. Short-term contracts offer far less security for this reason so you’re usually justified in charging a higher rate for them.

Then there’s the benefits you lose once you leave the relative comfort of your full-time position such as paid sick leave, annual leave and paid public holidays, and the potential costs associated with running your own contracting business such as setting up a Proprietary Limited (Pty) company structure and registering for an ABN, office space rental if you don’t wish to use your home as your registered place of work, stationery, electricity, and computing, as well as insurance for things such as professional indemnity and public liability, and accounting for tax compliance, all of which may be compulsory in your line of work.

At Finite Recruitment specialising in Technology, Digital Risk and Business Transformation roles, they offer a choice of contracting engagement models.  If you are new to contracting, the “Freelance Professional” contract has a number of advantages to offer.  Freelance Professionals are independent contractors who engage with the agency to provide services to the agency’s client on behalf of the agency. Many contractors choose to be Freelance Professionals (rather than setting up a Pty Company) because they prefer the simplicity of the agency managing their tax, superannuation and insurance for a small agreed fee, and they want to avoid the administration burden / cost associated with having their own company.

Alternatively, Pty contractors engage with Finite through an incorporated company (which could be their own company or a payroll / management company) and are paid their fees gross (without deduction of tax or superannuation). The Pty is then responsible for the payment of any tax and superannuation from the fees, as well as for their own insurance cover.

 

Calculating the most suitable rate

Once you’ve taken all of the above into consideration contracting may still seem like the most attractive proposition for your circumstances, especially if you have no desire to remain in your current position.

So how do you calculate what your hourly rate should be relative to your current salary, as a starting point at least? One way is to add 35 per cent to your base salary and divide by 2000 (the nominal number of hours worked in a 52-week year, which comes out at just under 40 per week).

So, if for example, you have a base salary package of $100,000 a year, you would then add 35 per cent, which should provide adequate compensation for all the benefits you’re foregoing. This would give you a nominal salary of $135,000 a year, divided by 2000, which comes out at about $68 an hour, so if you were talking to a recruiter you would quote something like $70 an hour as an acceptable figure, not that you’d necessarily get that. Using the same calculations, if your base salary is $130,000 a year, you would arrive at an hourly rate of $90 ($175,500 divided by 2000 = $87.50 rounded up).

Of course, this figure is arbitrary and you can always adjust your percentage add-on as you see fit, depending on the length of the contract, its location, how much the end client wants you for the role and of course how much they are willing to pay.

Like most things work-related, contracting has its benefits and pitfalls, so finding the right rate will be an iterative process, but it should always include an adequate level of compensation for the things you’re giving up by leaving your full-time position. This is where using the services of a large, specialist agency such as Finite has its benefits, as they can give you a realistic current market appraisal on what your skill set and experience can typically command as a contractor in terms of an hourly or day rate, along with an overview of where they might be able to place you into a contract engagement with one of their clients.

 

For more information on contracting generally, contact your local Finite office today where a Consultant will be pleased to help.

 

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