Full Time Employment Vs. Contract Work

1. 1. Fab

   Well, for me contracting is also about feeling a little more free from the job system. It gives flexibility… why not working 4 days a week for others ans 1 day per week for a personal project… that becomes an option.

   Also it is a great experience, creating a small corp. and being the one employee of it… you have to learn the basics of finances a different way than when you are full time employee. Makes you realize how much different services are costing (insurances, health care, pension…).

   I don’t know yet, how it compares financially to the permanent job… but I hear it’s supposed to be better. Should know about that in year I think, when all expenses and taxes will have been paid… and I can see the full picture.

   Sep 5th, 2007 @ 8:26 am

2. 2. The Financial Blogger

   I agree with Fab, the flexibility and also the tax advantages are the best things out of contract work. You can deduct your car expenses, a part of your mortgage and get back taxes on several goods if you incorporate yourself.

   However, contract work might now apply to all kind of position. I guess it could be a good idea for you FT, as an engineer?

   Sep 5th, 2007 @ 9:34 am

3. 3. FrugalTrader

   FB,

   Yea, I guess it could be good for an engineer with specialized knowledge. Actually, contract work could be good for any profession. Perhaps I should look into it further.

   Sep 5th, 2007 @ 9:46 am

4. 4. The Financial Blogger

   I don’t know about any profession. I don’t think I can do much as a banker without a bank! lol!

   Sep 5th, 2007 @ 11:22 am

5. 5. Canadian Dream

   Both options have ups and downs. My office has both consultants and full time employees and I think you covered the basics well.

   As to consulting work in general, it’s rather like a cliff where you know at which point you don’t have any further work booked. Each job pushes off the cliff for a bit longer, but in all your planning you know it is still there.

   If you can stand that hanging over your head and you have enough experience and skills I would suggest consulting work. For engineers in general, I wouldn’t bother looking at it until you have at least 5 to 10 years experience. Otherwise why would they pay a consulting fee when then can pick up an employee for cheaper.

   Tim

   Sep 5th, 2007 @ 11:29 am

6. 6. Matt

   When it comes down to it it’s really what you’re comfortable with. Some people need the security and added benefits; stability and comfort level are extremely important if you’ve got a family. On the other hand if you like the flexibility to set your own hours and even take time off between projects being a contract worker is perfect. I like both and personally I just choose the employment route because of my debts.

   Sep 5th, 2007 @ 11:41 am

7. 7. qubikal

   I know a lot of people are hired as a contractor (with a 6 month term, and then are extended continuously) - this allows the companies to not pay benefits and reduce the requirement for a severance payment if they need to reduce headcount.

   As the person working, and filing for the tax deductions; they need to ensure that they follow the 4 criteria in determining whether they are eligible as a contractor in the eyes of the CRA. It’s not always that clear.

   http://www.taxtips.ca/personaltax/employees/employeevscontractor.htm

   control - more control is generally exercised by an employer over an employee than by a client over a self-employed person
   bullet

   chance of profit/risk of loss - self-employed persons usually have some degree of financial risk, and more opportunity for profit than employees
   bullet

   integration - an employee’s job will be an integral part of an employer’s business, where the tasks performed by a self-employed person will likely be less integrated with the client’s business
   bullet

   tools and equipment - self-employed persons are more likely to be supplying their own tools and equipment, as well as being responsible for their maintenance

   Sep 5th, 2007 @ 1:03 pm

8. 8. contractor

   I think one of the biggest myths about a fulltime job is stability and job security. I’ve worked at two different companies that have downsized without warning and as a result have been laid off. I was left to fend for myself, without warning. After the second time it happened I took my career in my own hands.

   Now, I make around 225k/yr, I set my own hours, and I’m in full control of my career. I usually work 40 hours a week or more because I simply love what I do, but if I want to work a short week or or I need some time to run errands or do things around the house, I take the time when I need it. Even if I don’t find work for 3 months, it doesn’t matter. I have a large emergency fund for those situations, and even then the longest I’ve ever gone between projects was 2 weeks.

   When you’re good at what you do you can always find people eager to employ your services. The key for me was just getting past the job security myth and putting my future in my own hands. All it took was turning a bad situation like being laid off into the opportunity of a lifetime.

   Sep 5th, 2007 @ 3:33 pm

9. 9. FrugalTrader

   contractor, yes it’s the same idea as to why most people go fixed, b/c they always see the worst case scenario as what’s going to happen. Also, perhaps some people are simply happy with what they have and don’t feel the need to push the envelope.

   Sep 5th, 2007 @ 4:37 pm

10. 10. Gates VP

    I’m with contractor on this one. There simply is no job security (except maybe with unionized government?) Truth is, if you’re working for big biz, one of two scenarios are at play:

    1. You are generating lots of income
    2. You are generating “just enough” or “not quite enough” income.

    If you are in group #1, you could likely be billing more alone, b/c right now you’re supporting the company’s profitabilities, the shareholders, and everyone in group #2.

    If you’re in group #2, you don’t actually have job security b/c you’re not actually generating income. Smart companies don’t downsize their #1s, they don’t let go of their top generators. No car dealership is going to willingly part with their #1 salesman, b/c he’s typically selling more cars than the bottom 3 combined. If anything, they’ll pay the #1 salesman twice as much as the chumps and let the chumps go.

    So, end of the day, you’re either fit for the chopping block or likely underpaid, b/c you’re hoisting up everyone else :)

    But even then, I wouldn’t imagine the smart ones feeling their job is “secure”. You may be slighted by a poor manager or suffer when “the Board” arbitrarily decides to cut staff from top-down (b/c the company is bleeding).

    The simple truth is, we’re all contractors.

    Some of us just make less b/c we’re not freelance. We’re all on your blog, b/c we want to get rich (or we’re already there), but we all know that the best way to do that is to become a “contractor” and to leverage the time of others in a constructive way.

    Working “for the man”, is a generally inefficient, but relatively “secure” way of building wealth. But in the modern economy let’s not imagine any real form of security. If you are a “wage-slave”, the #1 mindset change is to instead believe that you are a contractor, even if you’re on salary.

    “Contractors” become wealth b/c they strive to generate wealth. “Employees” remain poor, b/c they strive to survive. They somehow believe that without “the company” they will not have useful work to perform tomorrow.

    These are vague and highly general, but you get my point: contracting is more than just a decision, it’s a mentality :)

    Sep 5th, 2007 @ 6:43 pm

11. 11. FrugalTrader

    Gates, another quality comment. It really hit home when you said “contractors become wealthy b/c they strive to generate wealth, employees remain poor because they strive to survive”. It rhymes too! :)

    Sep 5th, 2007 @ 7:04 pm

12. 12. WhereDoesAllMyMoneyGo.com

    I actually did an analysis for a client as his employer was looking to offer him a contract position with a raise over his F/T position - he had asked me to look at the dollars and cents of it - and we agreed we’d leave the subjective stuff up to him. In any case we looked at paid vacation, benefits, tax deductions - the whole nine yards. They had initially offered him a $10,000 pay increase to offset the additional expenses he would be taking on, but after doing the analysis and providing a written copy they agreed to a $17,000 raise since they hadn’t actually figured out the math. They had forgotten that contract workers do not have paid holidays etc. and their insurance rates were based on averages and the client was a bit more on the unhealthy range so his private insurance costs were higher.

    Sep 6th, 2007 @ 1:03 am

13. 14. MaNo

    FB, I’m an AMP (Accredited Mortgage Professiona), deal with about 40 dofferent lenders and make twice what the typical bank employee makes with the same responsibilities, not to mention, I set my own hours/appointments, etc. I wouldn’t go back to being an “employee” for love nor money, my life got much better when I went out on my own, and like “contractor” posted, when you’re good at what you do, people will find you, and if you’re on top of your own professional development, you’ll always be in the drivers seat!

    Sep 10th, 2007 @ 7:32 pm

14. 15. Vasile

    As a disadvantage, I am told that it’s more difficult to get a mortgage if you are self-employed/contractor than if you are employed. Can you comment on this?

    Sep 12th, 2007 @ 3:33 pm

15. 16. MaNo

    It can be a little more dificult, but not always. There are plenty of new programs in place that can usually place you in one category or another, there are BFS (Business for self) products and Contract products (no permanent employer, but a history of earnings and being employed). I use this type of mortgage product frequently when the client is working out of province, and have been employed by several employers over the past few years. We can use the average of 3 years tax returns to establish a predictable pattern of income.

    For business for self products, the Loan to Value is more likely to be lower (more money down) as most people that are self employed write their incomes down to much lower than actual levels in order to save on income taxes. The mortgage insurance premuims are higher in this case as well.

    Sep 12th, 2007 @ 3:47 pm

16. 18. Liz Wetzel

    Im new to this, please help me.

    I am a sql developer for a healthcare, i got two job offers, one fulltime with 75k a year , benefits, 27 miles from home. The other contract 6 mos 45 per hour. 2 miles from home.

    Jun 10th, 2008 @ 4:27 pm

17. 19. Gates VP

    Liz;

    $45 / hour ~ 90k / year

    All other things equal, this is about the same as having a 75k salary with vacation and decent benefits. (note this is for Canadians, In the US, the value of the healthcare plan is pretty heavy).

    Of course, not all other things are equal.

    27 miles = 1 hour / day = 250 hours / year of extra commute. That’s 10.5 days or about 5 extra weekends that you’re going to spend in the car for the salary job.

    2 miles = bikeable & lowered costs
    27 miles = dependent on your car & significantly increased vehicle costs

    So that 90k / year job is definitely starting to be look more valuable. You save 250 hours and 12,500 miles of travel. According to AAA the cost to operate a car in 2006 was 50-70 cents / miles. Gas makes up 8-10 cents of that and that cost has nearly doubled. So now it’s about 60-80 cents / mile. So again, that’s 250 hours and $8750 on the average car.

    So here’s what it comes down to: level of risk and what do you want to do?

    I’m 27 and married with no dependents. I have confidence in my skills and I enjoy a flexible schedule. If I didn’t become indispensable in 6 months, I’m confident that I would be able to find a new job quickly and inexpensively. I also place a high value on my personal time.

    To me, this is a no-brainer, take the close job with higher gross pay and the lowered time requirement. Your goal is to maximize your hourly earnings and one of these options clearly pays more. Imagine what you could do with an extra 250 hours every year!

    Of course, you’re allowed to make your own decision here, but things are definitely weighted against the lower paid full-time job. (see my comment above)

    Jun 11th, 2008 @ 7:25 pm

18. 20. Cooplet

    Should I get a fulltime job for $75K/year with benefits (3-mile drive) OR a contract job for 6 months at $50/hour, no benefits (38-mile drive)?

    Oct 25th, 2008 @ 12:39 am

19. 21. Gates VP

    Hey Cooplet;

    Your math is similar to Liz, but you flipped one variable around.

    38 miles = 45 one way = 1.5 hours day = 375 hours / year

    You will get to write off much of the travel cost as a business expense, but you typically don’t get to bill for travel time. Of course, the salary position typically involves some unpaid overtime (unless you’re in government), so how many of those extra 375 hours are you going to lose each year?

    Plus there’s the value of benefits. You’ll have to put a dollar value on those benefits to really make any kind of fair comparison. Do some research and compare those benefits (especially those you would use) with the cost of paying for them from you $50/hour.

    Also worth noting is company status. Are they both profitable? Are they both growing? What’s the relative value of the work you’ll be doing? If your work is going to generate (or save) a lot of money, then your value to the company will be higher. This is an important form of job security.

    Of course, you’ll also get some financial leeway in terms of taxes when you bill on contract. The final value of these two setups is likely to be very close. So from a pure numbers perspective this could tip your final salary one way or the other.

    Your goal is to maximize your hourly earnings. Spending 300+ hours in the car isn’t a lot of fun, but nor is unpaid overtime. Being able to write off the expense of the car on a pre-tax basis makes a significant difference in your ending salary, but you also have to account for other overhead costs (accounting for example).

    End of the day, you’ll likely take home more money on the contract gig, but the number will be close. However, you are accepting a higher risk for this decision.

    Oct 27th, 2008 @ 2:24 am

Trackbacks

1. Personal finance at KMull.com - Sep 10th, 2007
2. Weekend Reading - Sept 14, 2007 | Million Dollar Journey - Sep 14th, 2007

Reply to “Full Time Employment Vs. Contract Work”