How and Why I Quit my Job and Started a Contracting Company

CONTRIBUTED BY ANONYMOUS

When you’re frustrated by low pay and unresponsive managers, quitting your job and becoming destitute is one option. But it’s not the smart option. The smart option is to start your own company doing what they’re doing – and earn the money they’re earning (from your hard work) for yourself. Check out how remarkably easy it is to quit your job and start your own contracting company…

How to keep more of the money your hard work earns

How to keep more of the money your hard work earns

I spent seven years in university studying IT and have an MSc in Computer Science. I love working in IT! I’ve always enjoyed the interaction with my work colleagues and I enjoy the work challenges that you get to encounter every day in this industry.

Why I Wanted to Leave my Permie Job

By 2010, I had spent the previous 12 years working full-time in various roles for a small, yet successful, IT company. I typically did infrastructure management and consulting. It was good for me in some ways, including exposure to the industry and an opportunity to work on various projects. However, I finally got tired of the low salary, unfulfilled promises from management, and lack of control over which contracts I got assigned to, or didn’t.

The way this industry often works is that you have a permie (permanent) job with an IT company. They then sub-contract you out to their clients on projects.

However, in my case, there was a third layer involved. Instead of being sub-contracted directly to a client for whom I would then do the work, my employer often sub-contracted me out to another very large IT company. That IT giant then sub-contracted me out to their clients on any number of projects.

So, the money that exchanged hands looked something like this:

The IT giant billed their clients the equivalent of between $2,000 USD and $2,500 USD per day for my services. My employer received half of that. I then received a third of what my employer received, if I even got that much! As you can see, I was the one doing the work, yet I was not the one receiving the money.

It’s easy to accept this situation when you’re inexperienced and have no contacts. But, after years of essentially being ‘farmed out,’ it doesn’t take a genius to realise that you’re getting the short end of the stick. When you’re good at what you do, there comes a time when you want to be remunerated properly for the work you’re doing, rather than simply lining someone else’s pockets.

Ultimately, it was the push factor that finally made me opt for the change. It was many years of poor remuneration and unfulfilled management promises – and no improvement in sight.

How I Figured Out How to Make the Change

Colleagues I respected, and who’d been contracting for years, recommended the name of a good accounting firm. The accountants then guided me through the whole process of registering a company and setting everything up with the tax man. I first had to decide on a company name. Then I paid their company set-up fee, which was equivalent to about $300USD. They then did everything else.

I had thought that setting up my own contracting company would be difficult, but it couldn’t have been easier! All I really had to do was come up with the name and sign the papers they told me to sign. They still do most of it, processing all necessary paperwork on my behalf.

Now that my company is established, I pay them a monthly fee that is equivalent to about $150USD and they take care of pretty much everything.

Ongoing Paperwork Activities

The big thing that I have to do is to manage my own book-keeping. This basically means that I have to track my company’s expenses and what I earn, which is done through invoicing my clients.

My accountants have provided a structured spreadsheet for this and I just fill in columns in Excel. It’s really not very difficult. I just have to remember to keep it updated as I go along, which is essential for ensuring that everything is accurate.

Tax

I submit my book-keeping form to my accountants every month and they use it to tell me how much tax I own, which my company has to pay quarterly (every three months) to the tax man. That tax percentage gets calculated by the accountants so that I know not to spend that percentage of revenue so that I always have it available to pay on time.

At the end of each year, my accountants prepare an annual corporate tax statement, which I review and sign off. Based on that, I then have to pay corporate tax at some point within the following 10 months.

There is also personal income tax to pay and my accountants also do this. I draw a salary from my company so that’s the money on which I have to pay personal income tax. In the same way they prepare my company’s tax return, they also prepare a personal tax return for me.

Corporate tax is typically a lower percentage than personal income tax. Each contractor manages the balance in a different way to try to keep the tax they pay to a minimum. You should also do some research as there are different approaches to how you structure your company and your payment systems.

You have to be very careful about how you do this and you need to take advice from your accountants. I am a fairly risk-averse person so I don’t do anything that could even remotely be considered ‘tax-avoidance’ but I know some guys who do. I also know some who have been penalised by the tax man for their approach and have had to pay hefty fines, so this is not the sort of thing you should organise without expert advice. That means you should find accountants who are experienced in dealing with contracting companies.

Is it Worth the Extra Admin?

To be honest, it’s not a lot of headache. Yes, you have to do more than if you’re a normal permie employee for someone else’s company. But I  pay my accountants to take care of the headaches for me. I would never suggest anybody consider starting their own contracting company if they plan to manage all of the paperwork and taxation issues themselves. It can be done, but I don’t personally think it’s worth the headache to take on the burden yourself.

How I Find Contract Work

The employment side of this industry functions in two key ways: through professional contact networks you establish over the years and through recruiters who earn a placement fee (and often a cut of your ongoing earnings) for finding you work.

It’s much easier to find work if you’ve been in the industry for some time and have connections, but it’s not necessary. Recruiters have big incentives for finding you work, so your effort should be put into finding recruiters who place people with your particular skills.

The Cons to Contracting

The biggest down-side is: no work = no pay. Contracts often come in 3 or 6 month stints (or sometimes a year if you’re lucky). It is therefore possible to have extended periods of unemployment between contracts.

Second, there are also short termination notices, normally a month or less. Because contract renewals happen very last-minute, it can create anxiety around contract renewal time, when you’re not sure if you’re about to be out of a job or not.

Third, there is also more paperwork required, but I would say that I spend no more than 10 hours a month dealing with this. It can also be a little stressful when you have to make all your own decisions in areas where you might not be an expert.

Fourth, you also have to pay for your own training. On the flipside, though, you get to decide what training you want and you get it. You don’t always get the training you want as a permie. Any training you have to pay for is also expensable, which helps to offset the tax you have to pay.

Finally, you typically can’t work for more than two years with the same company, otherwise you may be considered a permanent employee and that will have implications on your client and on you that neither party is usually keen on entertaining. Sometimes you can get around this by getting hired by subsidiary or another division of the same company, but not all companies are open to this option.

The Pros to Contracting

Perhaps the biggest improvement is that, because my stress is related to my degree of control (or lack thereof), I now have more control so I am less stressed.

I now have a higher degree of freedom and empowerment. I am my own boss. I can dictate my own remuneration and decide how my company uses its money.  I can choose my own holidays, with agreement of course from the clients for whom I’m working. I can also choose which contracts to accept and which not to accept. If I’m unhappy with a client, I can even choose to terminate my contract with them.

Also, my hourly rate is now higher as a contractor than it was before when I was a permie. If you think of it, I’ve cut out the company I was working for, meaning that I now get paid roughly what they were getting paid. This means that my company’s before-tax earnings are between double and triple what I used to earn as a permie. Yes, I have to pay my own expenses and taxes on this, but it still means that substantially more money is ending up at my disposal than it did before.

Pension Plan

Pension plans are optional so you need to make some choices about that. Some contractors pay into their own personal pension plans, or have their company pay into one for them, or use their earnings to invest in other ways that will be useful during retirement. Each person needs to decide on this themselves, based on what they’re trying to accomplish.

Insurance

As a contractor, you really should consider taking out personal insurance which will cover you in the event of loss of work due to injury or illness. This insurance will pay you out a certain salary for a certain number of years, as agreed when you took out the policy. Anyone with dependents should really consider investing in this type of insurance. It also reduces the stress factor of the unknown quite substantially.

Liability insurance is another consideration. This is essential if you’re a contractor so you have to budget for it. It covers you if something goes wrong with your client and they decide to sue you. As far as I know, most clients will insist you have this before they’ll agree to hire you.

These insurance policies are costs you have to bear on a monthly basis, but they should only cost less than the equivalent of about $300USD a month.

Advice for Others Considering Starting a Contracting Company

The first thing I would suggest is to build up between six months to a year of living expenses. Keep that as a cash buffer in the bank, easily accessible if you need it. There will be times of unemployment and you want to be able to view them as a nice holiday to enjoy time with family and friends rather than stressing out while you look for your next contract. Make sure you save this buffer before you branch out on your own. 

The second thing I would advise is to get good accountants. These are the guys who take care of your paperwork and tax headaches so you want to make sure you’ve hired a quality company who know what they’re doing and who are efficient. Get word of mouth advice from people you trust. When looking for accountants, you should remember that you seldom need to see them face-to-face. This means that you can hire someone who lives nowhere near you. I’ve discovered that hiring a company based in a small town will cost you less than hiring a big firm in a big city. That might be a handy tip for someone.

Thirdly, it’s essential to keep all receipts. If you’re considering going contracting, start keeping them even before you set up your company as you may be buying new training, materials, or tech that will be an expense you can later use to offset your tax liability once your company is set up.

My fourth tip is that, if you’re keen to play it really safe, try to secure a contract before quitting your permie role. The name of the game is to reduce stress, increase your own empowerment, and improve your earning potential so you can improve the quality of your life.

Finally, always remember that there is always the ability to go back to full-time employment if you decide that owning your own contracting company is not for you.

FURTHER DETAILS

  • Contributed by:  Anonymous (via personal interview in Kuala Lumpur, Malaysia)
  • Written, formatted and edited by:  Krista Beauvais
  • Contracting company formation:  2010
  • Photo:  photo supplied courtesy of Krista Beauvais
  • Note about Comments: If you leave comments for this contributor, they can see what you say but will not respond directly to you, as responding will reveal their identity. If they want to respond, they may choose to do so via me. In that case, I will post comments from them to you, on their behalf.
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