Contracting - Benefits and Risks

What is a Professional Contractor?
Professional contractors are professionals with substantial freedom and control over how their career develops. They determine where they work, for whom they work, and the projects on which they work. But contracting is not for everyone.

With freedom comes significant responsibility and some loss of financial security and social continuity. For example, while you might make more money per hour, you may not work continuously throughout the year. For some people this is a benefit because it enables them to fulfill personal projects; for others, the thought of being without work for several months is frightening. Contracting enables you to divorce yourself from the politics of an organization-you're onsite for a limited time and only to complete a specific task. On the flip side, it is difficult to develop long-term friendships with your co-workers when you are only there for a six-month contract. As well, short-term contracts make it difficult to fully understand the company's culture.

The rest of this chapter explores what distinguishes a contractor from an employee and lists both the benefits and risks of a career in contracting. At its core, contracting is about big bucks and big fun!

Distinctions Between Employees and Contractors
The criteria that distinguish employees from contractors can be confusing. There are many rules that govern both relationships and each relationship between client and contractor is unique, so much so, that tax agencies often review each case individually. Tax laws governing the distinctions between employees and contractors change from time to time and are regionally determined. It is your responsibility to verify with your legal and accounting advisors the relevant rules in the city and country where you want to work.

The following information defines the distinction between someone working for a company as an employee or as a contractor and reveals some of the benefits and risks of working through an agency or not.

Finding work:
As an employee	You approach employers and the employers select who will provide the ongoing services. Generally, this happens without the services of an agency.
As an independent contractor through an agency	You are selected by the agency and recommended to work for the agency's client. The agency becomes the contractor to the client. Benefit: The agency markets your skills while you are working on a contract.
As an independent contractor	You approach clients for work directly. Risk: If you work for a client for longer than one year, you may be deemed an employee of the client which may cause tax problems later.

Getting paid:
As an employee	You are paid a fixed hourly or monthly salary directly by your employer. You provide services on an ongoing basis.
As an independent contractor through an agency	You receive a lump sum or hourly payment from the agency. You submit an invoice to the agency for completed work; the agency pays you within a defined period of time. Benefit: In many cases, the agency pays you on a regular basis, whether the client has paid or not.
As an independent contractor	You submit an invoice to your client and the invoice is paid within a defined period of time.  Risk: You rely on the client to pay you.

Managing the work:
As an employee	Your employer directs your work, controlling how. when, and where you perform the work.
As an independent contractor through an agency	The agency coordinates only the relationship between you and the client; you are responsible for determining the best manner for executing the work to produce the final deliverable. The client can set your work terms, but they will arrange this through your agency. Benefit: Using the agency as a mediator, you and the client can structure the work parameters to suit you both.
As an independent contractor	You are entirely responsible for managing and executing your own work within your clients' requirements. Risk: You and the client may have different ideas about when and how the work should be carried out and have difficulty resolving these differences.

Ensuring the quality of work:
As an employee	Your employer gives you feedback and deals with work quality issues directly.
As an independent contractor through an agency	The client may contact your agency if they have concerns about your work or behavior. Your agency will mediate issues between you and client. Benefit: Your agency keeps in contact with the client throughout your contract to monitor how the work is progressing. Your are alerted to any concerns and have the opportunity to make the necessary changes.
As an independent contractor	The client gives you feedback directly and you must work out a plan for improvement to complete the work and maintain the relationship. Risk: Your client may have diffuculty criticizing your work and will simply make an excuse to cancel the contract. Without appropriately timed feedback, you may have no opportunity to prove yourself.

Paying for benefits:
As an employee	You pay a portion of the premium and are covered under your employer's benefits plan
As an independent contractor through an agency	You are responsible for obtaining your own benefits and health insurance. Benefit: Your agency can give you information about insurance and benefits packages you can apply for. You can choose the package that suits your needs.
As an independent contractor	You are responsible for obtaining your own benefits and health insurance.Risk: You may have difficulty finding the best benefits package.

Paying taxes:
As an employee	You pay taxes as arranged by your employer. Usually tax deductions are made on every paycheck.
As an independent contractor through an agency	You are responsible for arranging to pay your taxes. You can set up payment plans to alleviate paying one large sum at once. Benefit: As a contractor you can claim business expenses. Check with an accountant to learn about expenses you can claim. You agency can likely recommend an accountant accustomed to dealing with contractor's taxes.
As an independent contractor	You are responsible for arranging to pay your taxes. You can set up payment plans to alleviate paying one large sum at once. Risk: If you work for a client for more than one year and are not incorporated, you may be deemed an employee and have difficulty claiming some expenses.

Tools and equipment:
As an employee	Your employer provides the necessary tools or equipment necessary to execute work.
As an independent contractor through an agency	You must have your own tools and equipment as not all clients require you to work on site. In some cases, the project work may require you to purchase additional tools and equipment. You should maintain a business office, even if it is just a separate space in your home. This space, and all equipment and tools should be dedicated to only business.
As an independent contractor	The same information applies as for an independant contractor working through an agency.

Terminating the relationship:
As an employee	You or your employer can terminate the relationship. If your employer terminates the relationship, they must be able to support the reasons for termination with documentation.
As an independent contractor through an agency	When the project is over, the contract is over. If the client has another distinct project they must arrange with your agency to create a new contract for the new work. You or the client can terminate the contract at any time without cause. Remember that if you terminate the contract, you risk tarnishing your professional image. Benefit: Your agency may be able to mediate and resolve underlying motives when the client wants to terminate your contract.
As an independent contractor	When the project is over, the contract is over. If the client has another distinct project they must arrange with you to create a new contract for the new work. You or the client can terminate the contract at any time without cause. Remember that if you terminate the contract, you risk tarnishing your professional image. Risk: If the client wants to terminate your contract, there may be no chance to negotiate.

Committing to work:
As an employee	You work full-time for your employer and not for anyone else.
As an independent contractor through an agency	You work for a number of different clients, or at the very least, must be able to prove that you could have worked for a number of different clients. File and maintain requests you receive to work on projects, even if you don't accept the work- these requests are proof of work opportunities. Benefit: Neither your agency, nor your clients can restrict you from working for others, but your agency can help you to find work.
As an independent contractor	The same information applies as for an independent contractor working through an agency, with the following associated risk. Risk: You alone are responsible for finding all potential clients and work opportunities.

Working with the client:
As an employee	There is an on-going relationship between you and your employer with no definite end-date. You are employed as part of the business and your work is an integral part of the business. You must attend company employee meetings and assimilate the company culture.
As an independent contractor through an agency	Your relationship with a client is temporary and related to your work on a contract. Your services are hired for a specific project, a specific time frame, or are peripheral to the client's core operations. You are not treated like the company's employees and do not attend the company's employee meetings. You do attend project meetings as requested.
As an independent contractor	The same information applies as for an independent contractor working through an agency.

Signing contracts:
As an employee	All legal documentation suggest an employment relationship.
As an independent contractor through an agency	There is a contract between the client and the agency and between your company and the agency. In all instances it is a contract between one business and another; that is why many agencies prefer contractors who are incorporated.
As an independent contractor	There is a contract between your business and your client.

Benefits of Contracting
Now that you understand the differences between working as an employee or as an independent contractor, it's easy to see the appeal of contracting, particularly contracting through an agency. For someone who is self-reliant, wants to work outside of company politics and limitations and likes new and exciting challenges, a contracting career may be just the thing.

"Seek opportunity, not security.
A boat in a harbor is safe, but in time its bottom will rot out."

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