OSK the Contractors accountants provide a free detailed guide to contracting answering all your questions.
Advantages of Contracting
Due to the short-term nature of the work, most employers are prepared to pay higher rates to contractors than to employees. The employer benefits through savings in holiday pay, sick pay, redundancy etc.
The freedom to change jobs on a regular basis without the formality of notice and without associated blemishes in career history.
The satisfaction and independence of being self-employed.
Not being fixed to set annual holidays. Having freedom to take extended holidays between contracts.
Working in different software environments adds to your skills, thus making you more marketable.
Experienced contractors are marketable in many locations, both at home and overseas, which may give you the opportunity to travel.
Possibility of organised tax planning through running your own business. Also, with tax not being deducted at source from your income, you can earn extra interest income.
Additional paperwork and day-to-day attention to your affairs is required as you are running your own business.
Ensuring you have enough money to pay the tax when it falls due.
You receive no remuneration for holiday periods - although your contract rate is increased to reflect this.
You receive no remuneration when absent from work through illness, although this can normally be offset by a good Permanent Health Insurance policy (the premiums paid will be tax deductible).
You are not protected by current legislation offering certain rights to employees.
You basically work continuously on the set of skills you had when you started the contact with little opportunity for career development or C.V. enhancement.
However OSK can help you to overcome many of these drawbacks:
There are four main routes which an individual may follow when he or she has decided to enter a contract:
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.
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.
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.
How do I form the Company?
There are several ways in which a company can be formed. The most common routes are through a company registration agent or through an accountant or lawyer. You choose your own business name and specify the objects of the company. The company will then be created to your own requirements within about five to seven working days. The charge for our company start-up service includes all advice given as to the appointment of company officers and shareholders and completion of the initial registration form for VAT, PAYE/PRSI and Corporation Tax purposes.
What Documents will I receive?
Certificate of Incorporation: The birth certificate of the company setting out where and when it was incorporated, and its registered number.
Memorandum and Articles of Association: The constitution of the company setting out the objects for which the company is formed and any restrictions on the conduct of its day to day business.
What forms do I need to complete?
How do I open a bank account?
It is recommended that the contractor open two bank accounts in the name of the company: -
What Expenses can I claim?
As a freelance contractor your limited company is allowed to deduct from its income most expenses incurred in the conduct of its business or performance of its duties.
The question of what qualifies as a tax-deductible expense is generally straightforward. However there are some grey areas which often only become clearer when the Revenue Commissioners specifically decide that a particular expense is or is not a deductible expense.
Some categories of expense such as company cars or mobile phones are fully deductible but carry an associated benefit in kind tax charge on the contractor, while others such as accountant's fees can be deducted without question.
Often the particular circumstances of the contractor (e.g. residence, contract location, contract length, nature of work) can make it straightforward to determine how an individual will fare in his attempt to claim deductions.
How is the Company money distributed?
By Remunerating Yourself
The contractor should pay himself a regular salary at a rate normally agreed at our initial meeting. Any funds left in the company at the end of the financial year should be paid out by way of additional remuneration.
By Paying Third Party Expenses
Certain expenses can be met directly from the company's bank account (e.g. accountant's fees, pension contributions, training etc.).
By Reimbursing Expenses to Yourself
There will be a few expenses which, by necessity, must be paid directly by the contractor from his personal funds, but which relate to company expenditure. The contractor should regularly reimburse himself in respect of this expenditure (either monthly or quarterly) in the same manner in which he would claim expenses from an independent employer. An expenses reimbursement claim supported by receipts should be submitted to the company and a cheque written to the contractor for the total claim.
By Paying Tax Liabilities
The payroll taxes and VAT may both be paid to the Revenue by Direct Debit from the Company's bank account. At the start of the year we will work out the amounts that should be paid and we will fill in the direct debit forms on your behalf. Paying by direct debit means that the liabilities are always paid on-time and it reduces the paperwork as you only need to file one VAT and one PAYE return at the end of the year.
If you are coming to work in Ireland from overseas we can advise on the best option for you including:
More and more individuals are taking advantage of the number of contract opportunities available overseas. When undertaking an overseas contract a number of special issues have to be considered, and the questions of exactly where you are going, and for how long become critical. It is important to work out where you will be resident for tax and local tax knowledge must be obtained and correct procedures must be followed if unnecessary penalties are to be avoided.
OSK will advise you on the best structure to use for your overseas contract. We will look in particular at the following areas:
How much can I withdraw for my own personal use from my company?
All monies taken from the company for personal use are treated as net salary. We would generally recommend that you fix your net salary at the start of the year and transfer the same net amount each month from your company’s account to your personal account. When estimating your net salary at the beginning of the year you will need sufficient funds in your company account to cover all business expenses including the income tax, social security and income levy due on your salary. Once we have worked out your net salary we would then calculate the income tax, social security and income levy due and recommend that you set up a direct debit for this amount to be paid to the Collector General each month.
Where possible, please do not use your company bank account or cheque book for personal expenses – all personal expenses should be paid in the usual way from your personal bank account. At the beginning of your accounts year an estimate of a net salary figure should be calculated as follows:
Gross annual income (excl VAT) (Estimated)
Less estimated business expenses
Less Pension Contribution
Less PAYE est.
Less income levy est.
Less PRSI est.
Net salary to be withdrawn per annum
If you withdraw more than the net salary calculated at the beginning of the year an additional PAYE/PRSI liability will arise, and if this extra liability is more than 20% of your total liability for the year an interest surcharge will arise.
It is therefore, recommended to revise your monthly direct debit to the Revenue, if your circumstances change during the year. For example if your daily charge out rate is amended, if a bonus is received, if the length of your contract changes or if you incur higher expenses than anticipated.
If you wish to make a pension contribution during the year this will also affect your net salary calculation.
What is a Capital Allowance and how is it calculated ?
For accounting periods ending on or after 1 January 2001, the annual allowance is 12.5% on a straight line basis. Expenses are generally categorised as either Capital Expenses or Revenue Expenses. Revenue expenses include the annual running costs of your company. You incur a Capital Expense when you purchase some plant and machinery that you expect to use over a number of years. In this case you would not be entitled to claim the cost in full in the year it is incurred. Instead you would claim an allowance over five years or the life of the asset. Whichever is shorter.
In your accounting period end on 31 March 2001, and during that year you purchased computer equipment costing €8,000, you would be able to claim an annual allowance of €1,000 in the year of purchase and the next four years.
If you sell or dispose of the computer during the eight year period you would be able to claim a “balancing allowance” to ensure that you obtain full relief for the cost over the life of the asset.
If the sale proceeds are greater than the written down value, then a ‘balancing charge’ arises. This will claw back any allowances previously given.
Can my company pay for a travel Bus or Train Pass without any tax charge?
Any benefit-in-kind arising from the provision of an annual or monthly bus or train pass by an employer to an employee or director is exempt from income tax. The exemption will only apply in respect of a bus/train pass issued in respect of a scheduled licensed passenger transport service.
What is the tax position if I take a contract overseas?
If you go overseas to work you will always have to take into account your potential tax liability in Ireland and the country where you are working. You will need to establish whether or not you will remain resident for tax purposes in Ireland throughout the time that you are working overseas. Your residency status will determine whether or not you have income tax to pay in Ireland. There are various reliefs available including foreign earnings deduction; cross border relief; treaty relief; shift-year relief. Quite often you will be entitled to claim travelling and subsistence allowances. The whole area of working overseas, your residency status, and the reliefs available is very complex and specialist tax advice should always be obtained in advance of taking the overseas assignment. It is beyond the scope of this guide to cover these areas in detail. For more detailed information on this please view OSK International.
If you decide to purchase a company car the company will receive an invoice for the vehicle and all repayments will be made from the company. No VAT can be claimed back from the Revenue on the purchase of a passenger motor vehicle.
If the car is leased the lease interest will be tax deductible. If a loan is obtained to purchase the car the loan interest equally will be a tax deductible expense. As a car is considered a capital purchase you will be entitled to claim a capital allowance.
The company would be able to pay all the running costs of the car e.g. petrol, insurance, tax and servicing. If the car cost €24,000 or more there is a restriction on the amount that may be claimed by way of expenses. However, you will have to pay tax on the value of the benefit in kind as the car would be available for your private use.
One drawback of a company car is the fact that the company owns the car. If you decide to cease contracting in a few years you will have to purchase the car from the company for its then market value, otherwise you will be taxed on the value of the car as a benefit in kind.
What is the Benefit-in Kind charge if I have a company car?
If you company provides you with a company car for personal use then you will have to pay tax on the value of the benefit in kind each year.
The benefit-in-kind on a car is 30% of the open market value of the car (i.e. the open market value is the retail price before registration in the State).
The benefit in kind can be reduced if you bear the cost of fuel, insurance, repairs/servicing and road tax.
This figure can also be reduced if your business mileage exceeds 24,136 km per annum.
A benefit in kind will also arise if your employer (i.e. your company) provides you with a van for private use. However, the value of the benefit in kind is calculated on a different basis. The value of this is 5% of the open market value and the annual running expenses, the value, as calculated, is then reduced to take account of the fact that you use the van for business purposes.
How much can I contribute to an Occupational Pension Scheme?
If you contract through your company you may take out a company pension scheme. This would be a scheme set up in your company name rather than your own name. There are various conditions that must be met, including the requirement for your company to fund at least 1/6th of the last of the pension benefits.
You, as an employee, may also make contributions to the fund, and a maximum amount that you may contribute is 15% of your remuneration. Tax relief will be available at your marginal tax rate.
What are Retirement Annuities?
Individuals who are self-employed and individuals who are in non-pensionable employment may make contributions to a retirement annuity plan. The amount of contribution that may be paid is subject to certain limits. Individuals may claim relief on premiums on the lessor of their net relevant earnings and an earnings cap of €150,000. The allowable contributions as a percentage of net relevant earnings or the cap if applicable are as follows:
Age during the tax year
Less than 30
30 but less than 40
40 but less than 50
50 but less than 55
55 but less than 60
60 yrs and over
Generally, tax relief will be given in the tax year the contribution is paid. However, contributions paid between the end of the tax year and the return filing date (i.e. between 6 April and the following 31 January) may be treated as paid in the tax year.
What are the implications of a company giving a loan to a director?
A loan to a director of a company is deemed to be an annual payment made under the deduction of income tax. The company is obliged in such circumstances to pay over income tax at a rate of 20/80ths of the outstanding loan at the end of the year to the Revenue Commissioners. If the loan or part of the loan is repaid the company is entitled to reclaim the proportionate part of the tax originally paid over. A claim for repayment must be made within four years. No interest is paid by the Revenue on these refunds. If such a loan is written off and not repaid by the director the grossed up amount of the loan will be regarded as income of the Director.
What duties do I have as a director?
In summary directors of a limited company have a duty:
What are the Consequences of Breach of Duty by a Director of a Company ?
An action may be brought by the company against the director to render him personally liable for any loss caused to the company by, or to account for any profit obtained by him from, his misconduct. In certain limited circumstances a court may order that the relevant director be held liable without limit for the debts of the company.
Fines and imprisonment
In the cases of duties and responsibilities which are imposed under the Companies Acts, fines and, in some cases, imprisonment can be ordered by a court in the event that a director is found to have breached any of these duties and responsibilities.
Restrictions and disqualification orders
A director can be restricted for five years from being appointed or acting in any way, whether directly or indirectly, as a director or secretary or being concerned or taking part in the promotion or formation of any company unless it meets very strict requirements.
Please contact OSK the Contractors Accountant today of you have any queries in relation to the above.
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