The contracting role in the ICT industry is emerging to become very profound and good number of IT employees working in the industry consider switching into the contracting role as imperative.
The daily rate can seem very impressive and you might have the urge to make a shift seeing a very considerable number of your colleagues plunge into the contracting world. If you carefully look at the drift, some just follow the crowd and there are some who moved to the contracting profile with a lot of questions in their mind as they consider the move.
Here are some of the key numbers that your much consider before you make the switch. If you are already on your way or working as a contractor, that’s great…but see if you have ticked of all the below boxes:
Well, when you think about this transition, all this while you were paid as an employee that meant you had nothing to worry about apart from the income tax and lodging your year-end tax returns.
But, as a contractor, if you are paid more than $75,000 a year, you might then have to register for GST. The first thing you have to do is register your entity for GST. So, from here on the income you receive as a contractor will include GST and it is your obligation to remit this GST to the ATO usually on a quarterly basis. Wait, of course you are eligible to claim GST on purchases you make directly related to your income for instance, laptop, and business use of phone & internet expenses etc., however, they are all subjected to PSI rules. But the bottom line is that you need to put aside a budget of 10% on your gross income.
When you are working as a contractor the compulsory super contributions will no longer be affecting your superannuation account. This was 9.5% of your gross wages. So, being a contractor you will need to ensure that you are making superannuation contributions and maintaining the level of superannuation required for your retirement. However, it is important to understand the contribution level, be it a personal contribution or employer contribution in order to be entitled for the deduction. So, it’s best to have a plan here.
You have to ensure that you are putting away at least a 9.5% of your gross income towards your retirement planning.
30% Budgeting for Income Tax:
We understand there is a lot of savings required for that beautiful home you planned on buying for your family, or that car you always wanted to drive. But here, planning for tax is crucial because as a contractor your taxes are not withheld by the employer. So we recommend that you set aside a portion of your earnings monthly or fortnightly. Generally, this should be at least 30% on your turnover (based on $150,000 per annum of your net income).
It’s all about planning; it’s advisable that you set aside a percentage of your gross income so that you are not taken by surprise where there are any financial constraints at the end of the year.
Here’s a Magic Formula that you might want to take a look at:
Apply this formula to work out if you will be compensated adequately when switching from employee to contractor:
Your Gross Wages ≥ Daily Rate Ex GST X (Total working days in the year + 20 Annual Leave days + 10 Sick Leave days) X 1.095
The information contained above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, please contact us on 03 9779 3200 or at firstname.lastname@example.org for tailored tax advice.