Guide to setting up as an IT Contractor - OSK

Agency Employee

The individual becomes an employee of the agency who then places him or her on a contract at the premises of a third party. Generally very few of the advantages or disadvantages mentioned earlier apply to agency employees and this guide does not attempt to outline procedures to be adopted by agency employees. Briefly the following points are relevant to agency employees:

Earnings will be higher than those of direct employees, but will generally be approximately 12% lower than those contracting on a self-employed basis or through a limited company. This is because the agency will have to pay employers' Pay Related Social Insurance (PRSI) and this will generally be deducted from the earnings of the contractor.

Full tax and PRSI will be deducted from earnings at source.

None of the possible tax advantages of running one's own business will accrue to an agency employee.

Self-employed

The individual registers his own business with the Revenue Commissioners, either as a sole proprietor or in partnership with another individual (spouse, other contractor etc.).

Generally, all the points outlined throughout this guide are applicable to a contractor who decides to take the route of self-employment. In addition it can generally be stated that self-employment offers various advantages over the other three routes e.g. tax is not paid under the PAYE system, less administration and paperwork and cheaper accountancy fees.

However, it must be emphasised that self-employed contractors do not generally conform with the Revenue Commissioners' definition of a self-employed person. Nor will you find that many agencies are willing to offer you a contract on a self-employed basis. The criteria is simple - are you "self-employed"? Normally any individual who spends his time during standard office hours, five days per week, at the premises of one third party, using that person's equipment, facilities and utilities and performing services on behalf and under the control of only that third party, would not be deemed to be self-employed, but would in fact be deemed to be an employee of that third party.

Therefore, although during your contracting career you will meet "self-employed" contractors, you must seriously ask yourself if you conform with the Revenue Commissioners' criteria. The only way you could possibly convince the authorities of self-employed status would be by having a number of "clients", and working on several projects at the same time.

Umbrella Company (Composite Company)

The concept of the Umbrella Company (or Composite Company as it is sometimes known) has become popular recently.

An Umbrella Company is a halfway point between the agency employee and Limited Company routes. The Umbrella Company is set up and run by a third party (often a firm of Accountants). The contractor becomes an employee of the Umbrella Company and all invoicing, VAT returns, tax, administration, bookkeeping etc. are handled outside the control of the contractor. The contractor is paid a salary related to his earnings.

The concept is directed primarily at contractors on foreign assignment and some contractors use it as a first step towards having their own company. Individuals who are on quite a low contracting rate and/or those who are going to contract for a short period of time, may find it cost effective to use an umbrella company.

Limited Company 

Most contractors follow the route of forming a Limited Company on commencement of their career as a contractor. The advantages and disadvantages of this route are as set out in the previous section of this guide.

The contractor forms, or buys, a limited company. The limited company enters into a contract with the agency to provide specific services to a third party, and then the limited company employs the contractor to perform these services in fulfillment of its contract. The contractor generally will become a director and major shareholder of the company.

This guide is specifically directed towards the contractor who has opted to follow the Limited Company route.

OSK Contracting provide quality and professional business advice to indigenous Irish businesses. Our clients include government bodies; multi-national groups; PLCs; SMEs and sole traders but we specialise in progressive indigenous Irish family owned businesses.

Reprinted with kind permission by OSK Contracting www.osk.ie

Phone: 01 439 4200 East Point Plaza East Point Dublin 3