PAYG or Company structure for IT contractor

I have got an contract job offer through a job agency. There are two options:

1. PAYG Employment contract: agency will pay me as normal employee: daily rate + superannuation
2. Contractor agreement: I will register a company and have professional indemnity insurance. Pay rate equals daily rate + superannuation + GST.

From my personal point of view, I prefer contractor agreement option thought there are cons and pros of contractor agreement:

Cons:
1. As the annual income exceeds $100K p/a, I can benefit the company profit tax of 30% instead of personal income tax of 37.5%
2. I can claim the expenses for traveling from registered office to client sites or other business relating expenses.

Pros
1. Paper works for annual statements required by ASIC
2. Annual statements fee ($246 pa for proprietary company), professional indemnity insurance ($??)
3. Book keeping/accounting works
4. Deal with ATO

Are there anythings that I have to consider when setting up a company?

Does ASIC requires a compulsory professional accountant for a company book keeping or I can do book keeping by myself?

If I use an accountant, how much does it book keeping cost for an IT contractor?

 

If you have a job then either way you will be taxed personally. PSI rules

But setting up with a company can give greater asset protection when contracting (except they will require a personal guarantee probably) and allow you to build a 'business' in the future.

 

Yes there are finance implications with going ABN contractor vs PAYG contractor. Lenders will treat you as self employed which means you would need to be on the sidelines between 1 to 2 years depending on the lender and LVR.

Its often financially beneficially to be an ABN paid contractor but you limit yourself from a lending perspective.

Lenders make allowances for IT contractors due to the nature of the role but preference would definitely be to go PAYG contractor.

 

Thanks Terry and Shahin.

I am not intent to buy IP in the short term. So, should ABN contractor be better for my circumstance? As an ABN contractor, I can pay GST quarterly. It means that I can use this money to put in offset account until the GST payment due date. It helps me reduce loan interests.

 

I'll be dead by then

 

You are in the best position to make decisions as you have a good feel for what you plan to do in the future - its good that you are asking these questions and determining all the potential issues on all aspects of the game, tax, finance, etc.

 

Haha yes I just edited it - I get excited when talking about IT PAYG contractors vs ABN Contractors.

 

As @Simon Hampel said it, be mindful of PSI rule.

Plus newly minted company income can limit your borrowing capacity/ lenders.

Also consider super, Annual leave allowance, Public holidays, sick leave etc.

 

You will also need workers compensation insurance for your employees (including yourself if you are working).

Are you able to provide another employee of your company to do your work? Ie the control test.

 

Hey,

Few things to consider...

As an Employee... you get paid Superannuation (9.5%), have the tax withheld, should get annual leave, sick leave and ultimately long service leave and have no or very little additional administrative requirements. This is the easy option.

As a contractor...

Firstly I'll point out there isn't actually any requirement to register a separate company, in fact outside of some limited asset protection there is actually very little reason to do it.

On the superannuation, depending on what exactly you will be doing and how you are required to do it, your contractor may actually still legally have to pay it (there are a lot of resources on "employee vs contractor" determinations. Most employers who want people to operate as contractors are trying to avoid this obligation and are very likely to become difficult if you start talking about your rights. Assuming you are actually a contractor, you want to make damn sure you're getting paid at least 9.5% extra for the lost superannuation than you will be as an employee. Super is complicated at the best of times but make sure you aren't getting ripped off.

On the tax... I'll cover both GST and Income tax here. Firstly as a contractor with a turnover of more than 75,000 you will be required to register for and remit GST, this is an administrative pain in the ass. Make sure you factor it in though, essentially you're losing 10% of whatever they're paying you so make sure you charge whatever the rate was going to be ADD 10% for the GST and not just charge the original amount with GST then getting taken out.

Income tax you will have bills at year end because you wont be paying anything in the meantime. You will then get whacked onto instalments after that, which are a quarterly administrative task that is, again, annoying. Again make sure that you are getting whatever your gross pay was going to be on the employee scale as a bare minimum because you will be losing 30%+ of it to income tax when you do the return.

As a few others have mentioned, PSI rules are probably going to apply to you (certainly from information provided they will at the moment). PSI rules operate to turn contractors operating as employees back into employees from a tax perspective and severely limit your options. If you operate through a company they essentially force the income into your individual return and pay rates at individual marginal rates. They pretty much kill the benefits of a company.

Also be careful of FBT if you're operating in a corporate structure as any car purchased could be subject to it.

On the loss of leaves... again, I'd want to get a decent amount extra to forego this as a contractor. I'd be asking a good 15% more for it because you're giving up 6 weeks of entitlement on normal employee amounts as well as the possibility of long service leave down the road.

Administrative side of things is also going to cost money and time. You can do the bookkeeping on your own but unless you really know what you're doing with a company tax return you pretty much need an accountant to lodge it for you (looking at probably $1000+ as a starting price for this with financials). The aforementioned BAS/Income Tax Instalments are another pain in the ass, you've got all the insurances as have been mentioned, annual fees, company setup (another 1000+ most likely).

As an accountant, most people I see end up as a "contractor" for a single employer end up being worse off than just being an employee because it makes work so much harder on them and they don't negotiate for everything they miss out on under employer regulations. Unless you are planning on expanding and contracting for multiple businesses and essentially starting your own consultancy type business I think you'd be better off as an employee.

Obviously this is pretty vague advice and you shouldn't rely on it to make your decision, I'd suggest seeing an accountant and discussing the specifics of your situation as there might be some unique parts to your situation that haven't come up. For contracting to really be worth it you need to be getting paid a lot more generally than a wage slave equivalent.

 

I think you got your Pros and Cons mixed up there, buddy.