You have to eat lunch. You have to take the Tube, whatever. When the permanent employee eats lunch, it comes out of his or her own pocket. Not so the contractor. The contractor pays for their lunch out of pre-tax expenses. This makes a considerable difference. However, the contractor can claim these expenses resulting in only a 74 pence drop in their net income.
And the contractor can claim expenses for all of their work-related equipment, things like laptops, mobile phones, office equipment, broadband connections and so on. And the higher up the tax bands you go, the bigger the taxable relief on these essential work items. Have we forgotten, though, the benefits the employee enjoys?
They get paid holidays, sick pay, etc. The permie gets paid when they are on holiday. Assuming the contractors takes holidays the same as the permie, this cancels out, since the company is still paying the same cost per year. It isn't in the 4 range, but you also have to understand the accounting of loaded rates. Those rates include the costs of all the admin people spread over the other employees HR, Accounting, Facilities, etc.
Ask your CFO what your multiplier is, you might be surprised, especially if you work for a smallish company. Show 3 more comments. There are a couple of reasons, including: The position of a contractor is usually more temporary and tenuous than a regular employee. They miss out on a certain amount of stability. Sometimes the contractor gets the contract because he has specialized knowledge or experience that the regular employees don't not necessarily more or better , just different.
That's worth something at least for a while. Contractors also don't usually get benefits like health insurance coverage and the like. Contractors have to pay self-employment taxes instead of having the company pay employment taxes for them. This has implications such as: The contractor has to pay for any tools they need for the job. The contractor may be responsible for rectifying serious defects in their work at their own cost. In a way, they're implicitly being paid for results rather than for mere effort as employees are , even if they're being paid based on the time they spend.
The contractor only gets paid when they work. If they don't, for whatever reason, they don't get anything. It's the same as when you call a plumber to fix something: if the plumber happens to be sick that day it's their problem, not yours - you don't pay them for not showing up.
There is no such thing as job security. To get fired as an employee you generally have to screw up pretty badly. As a contractor your contract can generally be terminated for no reason, at short notice and without compensation.
If the company starts doing it tough the contractors are the first to go. Contractors don't get any of the benefits employees get. Contractors have to submit an invoice to get paid, which may well be delayed, disputed or as already mentioned simply not paid for no good reason.
An employee has strong legal protection and some government agency will fight on their behalf for their wages.
A contractor would have to take the company to court. As an employee, there are laws to ensure that you get your paycheck. As a contractor, you're just another creditor. An employee gets paid every month irrespective of the amount of work available. The consequence of this is that employees are always kept "busy". A contractor is free to declare their own taxes, so can keep that bill "artificially" low.
However, they also have to cover office, workspace and appropriate tools. Contractors also fail to get the benefits of healthcare, copayments on pensions and so on. Contractors can optimise their own work-time and take on additional work outside the confines of their main "job" and so gain additional income.
Expect this to have a big impact on the management consulting industry. Turukawa Turukawa 5, 21 21 silver badges 34 34 bronze badges. Featured on Meta. Now live: A fully responsive profile. Version labels for answers. Emolument provides bonus and salary statistics based on data submitted directly by professionals like you. It is free, anonymous, and already a trusted tool for thousands of professionals worldwide.
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