Why do IT contractors earn so much? The Short Answer
Contractors are seen as a short term investment with no employee benefits and limited rights. If your client wants to get rid of you, within reason you are gone.
Therefore, even though they seem that they are over paid, from a companies perspective, we are disposable assets, that they can bring in and get rid of based on project demand.
More Reasons Why
A question we want to comprehensively tackle in this article. If this is something you've been thinking about lately, well then, lucky for you because you happen to be just at the right place.
The main reason why contractors earn so much is because they charge more for their services than employees do. This is largely because contractors take on more risk due to the fact that they don't have secured full time positions, have other considerations like IR35, and have overheads they need to satisfy because they are self employed.
These overheads include the likes of income protection, insurance, unpaid holidays, critical illness, sickness downtime, unpaid holidays etc.
Another reason why they cost so much is because they have to consider "Bench Time". This is the period when a contractor has completed one assignment and is looking for another.
Undoubtedly, the most expensive part of the contractors life. Below we'll be determining which option really costs more.
Contractors Lack Of Holiday or Sick Pay
Contrary to popular belief, it seems that the benefits factor doesn't really change much when it comes to permanent and contractual employment. Permanent employees get their dues even when on holiday, however the one with contractual payment doesn't.
Assuming the contractor and employee receives the same amount of holiday time, this eventually cancels out because the company accounts for the same cost yearly when making there payments.
When matters of sick pay are involved, most employers protect themselves by taking out some form of insurance. These costs are normally factored into the salary the employee is paid and accounts for an average risk level.
You, as a contractor, can get the exact same insurance these companies use, of which will align to your risks as you see fit and at a considerably lower fee at that.
General Contractor Expense Claims
A cost that is incurred exclusively and wholly because of your independent contractor business can be written off as a business expense. This basically means getting tax reliefs on these said costs.
Claiming these business expenses, some of which we are going to list for you below, could greatly reduce your tax bill, so you might want to understand them a bit if your thinking of getting into the contracting business.
- Occupational Operating Expenses: The costs incurred for advertising your product, service or yourself will fall under this category. Internet services and web hosting fees can also be included here. The same will apply in business card production, phone line bills and any expense required for the business to function properly.
- Material and Supplies: All items and equipment needed to conduct business can be claimed as expenses and are tax deductible. These items include things such as cameras, computers, office machinery and stationary, and so and so forth.
- Home Office: For your home to be considered an office and a tax deductible, it must be solely used for business. That office space can't double up as a spare guest room for your out of town visitors. The tax deducted is according to size, for example, if the office takes up 20% of your home then 20% can be deducted off of each utility.
- Travel Expenses: This category is usually heavily scrutinised, but, is still a good way to keep a hold of some of your money when the tax-man comes to collect
Who Costs More, Employees or Contractors?
The truth is, it depends on how long a contractor lasts. In the long term and employee is a larger investment for a company, because they cannot get rid of an employee very easy, and a contractor is given a defined end date.
The package given to each employee vastly increases the cost for an employee. You'll need to remember that the employee will become more and more expensive as time goes by.
The tax considerations involved will also help determine which option may generally cost more than the other. Each option has its own pros and cons when concerning matters of this nature.
Why Do Employees Dislike Contractors?
Something that seems constant in the corporate world is that, more often than not, you will find that the permanent employee generally tends to dislike contractors.
It depends on where you go, and in some cases it can be very subtle. The most common excuse is that the pathological hatred comes about due to the jealousy the employee holds over the contractor. The big pay checks contractors receive is what gives rise to this jealousy.
Employees usually tend to feel that they work much longer and much harder than their contractor counterparts, however, still manage to earn considerably less for the same job as well as the skill sets required to accomplish the tasks involved in the said job.
Permanent employees should consider the fact that contractors have other responsibilities such as overhead costs and insurance policies to worry about. For the employee, these have already been taken care of by their employers
Why Contractors Earn More - Summary
Many businesses, especially the small ones, rely a lot on freelance workers and independent contractors because they usually prove more flexible and because these business owners have the assumption that the costs involved with this option are relatively cheaper than those of permanent employment.
Hopefully, this lengthy article, has led you to the realisation that determining which option is more expensive than the other involves quite a number of mitigating factors.
It will sometimes look like the independent contractor is more expensive to employ, however, you must remember that the permanent employee will inevitably become more expensive as time passes on.
This subject is one that is generally complex in nature and depends largely on individual situations. What most companies should do is to provide solid framework systems that cover everyone, including the independent contractors.
Hopefully, you now have an idea of what really determines the cost of employing independent contractors. If you feel that you might have something more to add, please do not hesitate to share your views. Tell us how you feel and don't forget to share.
But before you head of, lets dig a bit deeper...
Why Do IT Companies Even Hire Contractors?
Employees have been considered as an essential asset to companies since the begining of time, well not quit, but you get me.
When you start a company, you can run it alone, but soon, ones sales go up, you will run out of time and become the bottleneck. You need some manpower to enable you to run the company effectively. This is one reason why companies need employees and contractors for that matter.
This is common to all companies including IT companies. Surprisingly, you will find that nowadays, many IT companies prefer to have contractors instead of employees.
But why is that?
I know that the question that is ringing in your mind is, “why would a company opt to hire contractors in place of employees?” this article will help you understand why this is happening and what are the reasons behind it. Read ahead to gain more insights.
Why Do Some Ruthless Companies Sack
Employees to Hire Contractors?
In company finance you have two major expenses, Operating expenditure ("Opex") and Capital expenditure ("Capex"). Employees fall under the Opex category. And as discussed earlier, in the long term, can cost the company more.
If a company is under financial stress, and need to reduce head count, they may consider replacing long term employees with short term expensive contrators. Just so they can do the project, then got rid of.
That is the theory, but in reality, who knows when those contractors will go, IT projects are notoriously delivered late and contractors soon become valuable assets in delivering the project.
How Do Companies Save Money
By Hiring Contractors?
When a company is working with employees, it has to pay higher taxes to the
government. When they hire contractors, the taxes are less. This saves the
Employees need medical insurances while working with
companies. The company has to cater for these insurances. When the company hires contractors instead of employees, this expense is evaded. They can simply search on LinkedIn and look for a new potential short fix replacement.
Can a Company Exist With No
Employees and Only Independent Contractors?
It is possible for companies to work with only the CEO, contractor, subcontractor and even interns. With no employees at all. This gives the company flexibility.
The CEO only allocates work to the contractors. Since the company pays the
contractor to do the work, one does not need to stress him/ herself about
infrastructure, and equipment.
The contractor does the work given to him/ her using his/ her equipment. The company does not need to pay taxes for the equipment or the contractors. The only disadvantage would be lack of these contractors due to the location of the company. If a company is located in a cosmopolitan area, then they will get the desired contracting workforce because it will be large and huge.
Do You Need to be an Expert To Work Aa a Contractor?
An IT contractor works in their area of expertise. There no magic button that you can press and all of a sudden you become an IT contractor. If you have no skill in the area you want to have the contract, then there is a big possibility that
you are not going to be contracted by any one company.
You need to be very certain that there are so many people out there who are looking for the skill that you have. There is also need to understand whether or not after two years, your skill will still be marketable.
To be a contractor, you need to be ready to look for jobs on your own and also pay your taxes. You should ask yourself whether or not you are ready for this. Remember that you are hired for your skills.
Remember that people that are hiring contractors want to get the best skills in their work. They will look at your curriculum vitae to certain that you are worth the job.
As a company hires contractors, they know that they already are familiar with the job, and hence they do not need to be guided in any way. If you are thinking of being a contractor with no expertise, then I assure you are wrong. You need to first work on your skill before you can ever be an adequate contractor.
Do I Need a Liability Insurance as an IT Contractor?
Do I need liability insurance? The answer is yes; you need liability insurance. Liability insurance will protect you against any claims that may be made against you, regarding your employee.
In some contractors, you may find that will not start your contract without it. And, in some cases, only a certain minimum amount of cover is acceptable.
It's good to be safe. If you lack a liability insurance cover and you are supposed to be having it, the penalties are very severe. Instead of taking this risk of having to pay very big fines, why don't you get your liability insurance cover as an IT contractor?
In Summary - Why Companies Hire Contractors
The question is, is hiring contractors better than hiring employees? Well, it matters with the gap that you want the contractor to fill. If you need some short-term work done, then go for them. If it's a long-term position, this might not be the best idea to make.
From my experiences, companies usually believe contractors are an excellent "quick fix", to get a project done. But for you and me, this is great. Because we both know, there is a good chance the contract will take a lot longer than what was originally expected.