Personal Finance

Switching from Full time salary to Incorporate

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[OP]
Newbie
Jul 15, 2015
8 posts
York, ON

Switching from Full time salary to Incorporate

I work in IT and currently employed Full time with 80K annual salary with benefits like extended health, paid 3 weeks vacations etc.

I am considering switching to a contract position (Incorporated ) with a new company with an hourly rate of $55. Initially this is a 9 months contract with good possibility of extensions in future.

My colleagues tell me that I will save lot more if I go for hourly job. They say that my income taxes will be less as I can write some expenses like vehicle, meal etc. I don't need health benefits as I can get these benefits through my spouse insurances , who is full time also.

My question is that does it make sense financially to switch the job. The commuting time and working hours being almost same in both jobs. Will i be having more cash flow.
45 replies
Deal Addict
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Oct 13, 2007
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Keep the full-time position. In a nutshell, you have more rights as a full-time employee. Chances are that for stuff like a medical appointment, you can book off paid time as a salaried employee while as an hourly employee, you can get docked. Benefits such as life insurance, etc. may not seem worthwhile until something happens. Benefits are worth a big chunk of change and the value would far exceed any possible tax savings. Nine months is not a long time.
Member
May 6, 2009
261 posts
64 upvotes
Contract is usually the way to go, especially if your spouse can cover you for the health insurance.

Having said that, $55/ hour is too low of a threshold for someone making 80k (+ bonuses + 3 weeks paid vacation) to switch. At your current salary levels, you shouldn't switch for anything less than $65/ hour.

EDIT: I'm bored and in a meeting, so for kicks, lets do some math.


CURRENT SALARY POSITION


Assumption 1. 37.5 hours x 49 work weeks + 3 vacation weeks = 1950 hours worked per year. Embedded in this is number is that you get paid for 112.5 hours to do absolutely nothing at all (vacation).

Assumption 2: Assuming you get the average 10% annual bonus. Total salary is 88k/ year.

CONCLUSION 1:
Total hourly wage = $45.13/ hour (including vacation hours), or ~$47.90 (removing vacation hours but keeping the overall salary number).

Being able to write off some expenses certainly seems to further the advantage of taking the $55/ hour gig, but keep in mind that:

a) Contractors can be unilaterally let go without any notice/ warning
b) Even if you manage to keep the gig for the entire 9+ month term, at the end of it you still have to look for another job. Typically, as a contractor you want to be able to build up a buffer/ cushion for those months where you may be in between jobs.

Typically, expect for it to take at least 2-3 months for you to find that next job (although you can start job hunting while you still have your existing job, it helps to build yourself a buffer and NOT budget according to a rosy, happy-path best case scenario).


Now, running the analysis on the Contract opportunity:

Potential Contract

1. 9 months= 270 days = 38.5 weeks.
2. $55/ hour * 37.5 hours * 38.5 weeks = $79,553.

You get $80k (same base salary as before) in only 75% of the time, so it looks pretty good. The difference is that after 9 months you're out of a job and may potentially have a couple months of downtime before the next engagement. In addition to having to look for another job, you also haven't had vacation time, so stress is now a thing.


Everyone has a price, and despite all our idealistic views, we're ready to sacrifice our health and emotional well being if we get paid a bit more. Right now, it doesn't seem that making only $55/ hour would make that stress worth it.

A $65/ hour salary would give you ~94k in the same 9 months. This is a bit better as far as a financial cushion, and can better carry you over to the next job.

Ideally, you don't want to eat into that buffer at all; the whole purpose of going into a contract is to make more $$$. Even if you're making $65/ hour, dipping into those savings for even a few weeks/ month or two kind of defeats the purpose of going into a contract, since the stress you incur also begins to eat into the value of your savings.

Basically, at $55/ hour, this should be an easy no-go.


****

As an aside, based on my experience in working with/ hiring contractors, the base salary that the firm pays out is usually in the range of at least $70-$75. If you're only seeing $55 of that, my guess is that you're working with a large, multi-national job agency which is eating cake @ raking in almost a third of the salary you're supposed to be getting.

Try to find a smaller agency (or even an independent head hunter) so there's less overhead for them to worry about, so they can pass on more of the hourly rate to you, or go back to the agency and demand nothing less than $**/ hour.
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Oct 9, 2008
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GobiFool wrote: I work in IT and currently employed Full time with 80K annual salary with benefits like extended health, paid 3 weeks vacations etc.

I am considering switching to a contract position (Incorporated ) with a new company with an hourly rate of $55. Initially this is a 9 months contract with good possibility of extensions in future.

My colleagues tell me that I will save lot more if I go for hourly job. They say that my income taxes will be less as I can write some expenses like vehicle, meal etc. I don't need health benefits as I can get these benefits through my spouse insurances , who is full time also.

My question is that does it make sense financially to switch the job. The commuting time and working hours being almost same in both jobs. Will i be having more cash flow.
If you decide to go contract you really need to weigh the risks/rewards. Your compensation should increase by up to 50% (before tax write-offs) in order for the risk to be worth it imo. The trade-off is you have basically no job security while on contract since the employer can terminate at their own discretion and you need a constant backlog of potential future work. If your contract runs out and you have no future contract lined up for a long time you lose all the benefits vs. full-time.

I'm not sure what sort of position in IT you're in so I can't really comment on the $55 per hour but assuming you're 40 hour per week on a 9-month contract and it doesn't extend, you're only making 25% additional vs your fulltime position + tax writeoffs.
Deal Addict
Sep 21, 2007
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Toronto
I think it is relative to your current situation, if you are happy with your current job/colleagues/bosses, etc
Then you can take into consideration the other aspects (financial, benefits, commute time, etc)

$80K is about $40 per hour. $55 per hour is 37.5% pay increase from your current salary.
But as starchoice said, you need to take into consideration that only what you work you get paid. So you may not get as much, due to holidays, personal time off, etc.
However.. if you have a corporation, you can write off a lot of expenses, you don't pay for the HST on the goods you pay for the company use, etc.
Also, you can pay yourself a lower salary (which brings you in a lower tax bracket than $80K/year) and the rest of the profit you pay it to yourself at the end of the year as dividents (taxed at 20%).
I think if you can handle the stress of being out of work for a few months a year (in between contracts), you may be better off with contract work.
I know a few IT guys which are on contracts and they wouldn't go back to full time job. They said the most difficult is first 2-3.. maybe 4 years during which time you create your pool of clients. After that, they may give you contracts all the time.
The last guy I spoke with, he said he can't fulfill the demand.
That being said, you must consider all aspects. Being on contract is not for everyone.

By the way, I'm in IT as well, I'm making 85K a year but I am not happy with my current job. I get a lot of bull****, I'm requested to work overtime (they want me to work 10hr/day plus be available on weekends/evenings) and not getting paid for it; plus micro-management, etc (I'm working for a bank).
I'm looking to switch to a contract. At least, what I work, I am getting paid for. And if I don't like it, I can move on easier to something else.
I would appreciate if you would give me some details about the contract offering $55/hr, if it's something which fits my profile (I'm in systems administration/storage/vmware/linux), I'd take it if you don't want it.
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Member
May 6, 2009
261 posts
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MarcusXP wrote: I think it is relative to your current situation, if you are happy with your current job/colleagues/bosses, etc
Then you can take into consideration the other aspects (financial, benefits, commute time, etc)

$80K is about $40 per hour. $55 per hour is 37.5% pay increase from your current salary.
But as starchoice said, you need to take into consideration that only what you work you get paid. So you may not get as much, due to holidays, personal time off, etc.
However.. if you have a corporation, you can write off a lot of expenses, you don't pay for the HST on the goods you pay for the company use, etc.
Also, you can pay yourself a lower salary (which brings you in a lower tax bracket than $80K/year) and the rest of the profit you pay it to yourself at the end of the year as dividents (taxed at 20%).
I think if you can handle the stress of being out of work for a few months a year (in between contracts), you may be better off with contract work.
I know a few IT guys which are on contracts and they wouldn't go back to full time job. They said the most difficult is first 2-3.. maybe 4 years during which time you create your pool of clients. After that, they may give you contracts all the time.
The last guy I spoke with, he said he can't fulfill the demand.
That being said, you must consider all aspects. Being on contract is not for everyone.

By the way, I'm in IT as well, I'm making 85K a year but I am not happy with my current job. I get a lot of bull****, I'm requested to work overtime (they want me to work 10hr/day plus be available on weekends/evenings) and not getting paid for it; plus micro-management, etc (I'm working for a bank).
I'm looking to switch to a contract. At least, what I work, I am getting paid for. And if I don't like it, I can move on easier to something else.
I would appreciate if you would give me some details about the contract offering $55/hr, if it's something which fits my profile (I'm in systems administration/storage/vmware/linux), I'd take it if you don't want it.
Guys, don't accept the $55/ hour roles... see my edited post above.

Not only is $55 absurdly low for what you're probably doing earning 80-85k (although the hourly rate is a bit better, it's still not worth it when you consider all factors), by accepting these rates you're depressing the overall market.

The job agencies have done a great job in terms of eating cake and leeching off of our hourly salaries.
Deal Addict
Sep 21, 2007
1731 posts
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Toronto
brother_bruce wrote: Guys, don't accept the $55/ hour roles... see my edited post above.

Not only is $55 absurdly low for what you're probably doing earning 80-85k (although the hourly rate is a bit better, it's still not worth it when you consider all factors), by accepting these rates you're depressing the overall market.

The job agencies have done a great job in terms of eating cake and leeching off of our hourly salaries.
As I said, I'm getting to much bull**** here. Ideally I'd like 60-65, but in my current situation I'd even take 55..
Did you know as an IT worker you are not entitled to lunch hours, overtime pay? Some companies abuse that (including mine).
There has been a long discussion about this here, if you have the patience you can read on:
http://www.reddit.com/r/canada/comments ... empt_from/
So basically some companies abuse this loophole in legislation not to pay IT professionals for overtime, or even lunch time.
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[OP]
Newbie
Jul 15, 2015
8 posts
York, ON
Thanks for your input, guys. The discussion is really an eye opener for me - as i worked as full timer only, so far.

Jeenyus1: I am into Software testing and the new role is of QA engineer (Sr. QA analyst). On a side note, i really enjoy reading and follow your posts in the Investing forums and did make some money by investing in UWTI/ DWTI early this year.

brother_bruce: really appreciate your efforts in running the Math for me. You are right, I am getting this role through a recruiter and looks like they are getting a good chunk as they were very quick to bump the rate to $55 once, I declined the initial offer of $50.

just spoke to my accountant who is also of the same view as most of you that I should be getting $65 -70 so that the switch makes sense.
Member
Dec 5, 2011
495 posts
209 upvotes
Toronto
I'm not sure this is such an easy NO decision to make, in my opinion. I think it largely is contingent on how likely it is that OP will be able to extend his contract or find a new job, i.e. job security. Assuming that's not an issue, I'd say

If you make $55hour x 40 hours/week x 52 weeks/year, you're making $114.4K/year.
If you collect HST and use the quick method, you essentially make 4.2% more, or $119K/year.
You don't get vacation or stat holidays though, so let's say that's 3 weeks (vacay) + 2 weeks (stat holidays). factor that in multiplying by 47/52, you're now at 107K/year.

That's 27K/year (or 34%) more than 80K salary taking into account paid time off loss.

This does not take into account many factors including no benefits, increased overhead of incorporating and managing it (taxes, payroll, etc), tax deferral with a corporation, not having to pay EI or CPP, tax splitting through a corporation, slightly less tax by paying dividends and of course, writing off business expenses.

In my opinion, I'd take the contractor role. If the employer is willing to keep you on as an employee, they will keep you on as a contractor.
Member
May 6, 2009
261 posts
64 upvotes
No they won't. Companies (at least the telcos, which I am familiar with) typically have rules that limit how long a person can remain on the payroll as a contractor. If they exceed that duration, they either get shifted into a permanent (no guarantee you're getting the same rate), or you're let go.

Also, I think you're introducing new variables (such as making it a 12 month job when it expressly says 9), and discounting the fact that, even with a promise of 9 months, there's no guarantee that he'll even reach that tenure.

So you can't just wave away the impact of job security. That HAS to play a role in deciding whether you leave the [relative] stability of an F/T, because you need to be able to build up a financial buffer/ cushion to carry you through the periods where you're between jobs. The hourly rate needs to be adjusted to allow you to build that. Given that $55 is on the low end, there's no reason to push back for a higher rate.
Deal Expert
Feb 29, 2008
28885 posts
4607 upvotes
Montreal
GobiFool wrote: I work in IT and currently employed Full time with 80K annual salary with benefits like extended health, paid 3 weeks vacations etc.

I am considering switching to a contract position (Incorporated ) with a new company with an hourly rate of $55. Initially this is a 9 months contract with good possibility of extensions in future.

My colleagues tell me that I will save lot more if I go for hourly job. They say that my income taxes will be less as I can write some expenses like vehicle, meal etc. I don't need health benefits as I can get these benefits through my spouse insurances , who is full time also.

My question is that does it make sense financially to switch the job. The commuting time and working hours being almost same in both jobs. Will i be having more cash flow.
Read this first:

http://www.taxtips.ca/glossary/personal ... siness.htm
Deal Addict
Sep 21, 2007
1731 posts
52 upvotes
Toronto
dlhunter wrote: also consider recent CRA changes to small business deduction (PSB). it's huge time bomb for some folks and they don't realize it
http://www.thebluntbeancounter.com/2012 ... rvice.html
Oh, wow. I had no clue about this, until now.
What a pitty. So now basically everyone offering contract work, will have to be considered an employee. Wow..
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[OP]
Newbie
Jul 15, 2015
8 posts
York, ON
dlhunter wrote: also consider recent CRA changes to small business deduction (PSB). it's huge time bomb for some folks and they don't realize it
http://www.thebluntbeancounter.com/2012 ... rvice.html
Quite informative.

The wording of my contract is as follows. Since it’s explicitly written that contractor is an independent incorporated contactor and Not an employee of the company, Can I still be considered an employee or PSB and not an contractor? I am just curious to know the answer even if I dont go for this role.

Below is the text from my contract:

• The CONTRACTOR is an independent contractor "and incorporated under the laws of the Government" providing professional services

• Contractor will be providing services as a non-exclusive independent contractor and shall not be deemed to be an employee or agent of the Company and the Client for any purpose.

• As the Contractor is not an employee of the Client and the Company, the Client and the Company is not responsible for providing the Contractor with Annual Vacation Pay and/or Statutory Holiday Pay.
Deal Fanatic
Jun 27, 2007
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GobiFool wrote: Quite informative.

The wording of my contract is as follows. Since it’s explicitly written that contractor is an independent incorporated contactor and Not an employee of the company, Can I still be considered an employee or PSB and not an contractor? I am just curious to know the answer even if I dont go for this role.

Below is the text from my contract:

• The CONTRACTOR is an independent contractor "and incorporated under the laws of the Government" providing professional services

• Contractor will be providing services as a non-exclusive independent contractor and shall not be deemed to be an employee or agent of the Company and the Client for any purpose.

• As the Contractor is not an employee of the Client and the Company, the Client and the Company is not responsible for providing the Contractor with Annual Vacation Pay and/or Statutory Holiday Pay.
your contract has little meaning. CRA is using litmus test to determine PSB
1. how much control over the work a contractor has
2. ownership of tools
3. the chance of profit or risk of loss that a contractor is exposed to
4. the degree of integration

Basically, to give you an example from IT perspective who can be considered consultant under CRA definition: you develop IOS/Andorid applications, you have your own tools, you make design decisions, you bear financial risk in case your app not being sold, you might have many clients on the side at the same time, you work according to your schedule, etc

in a typical corp environment (banks, telcos, etc), you will never be allowed to bring your own laptop (security issues - eg virus, customer's private information on your machine, internal docs, etc). You are expected to work 9-5 (no flexibility), you must come to office everyday, attend meetings, work side by side with employees, etc. Financial risk is really low, and with 3 items against you, CRA could easily determine you're running PSB.

The obvious way to ensure that your small corporation is not deemed to be a personal services business at some point is to ensure that your corporation has more than five full-time employees throughout the year and/or that your corporation only provides its services to an associated corporation, as these are the two things that the Canada Revenue Agency lists as clear evidence that a small corporation isn't a personal services business. (See Ch. 4 of http://www.cra-arc.gc.ca/E/pub/tg/t4012 ... 862_208254)

More here: http://sbinfocanada.about.com/od/taxded ... ration.htm
Deal Addict
Sep 21, 2007
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Toronto
That is a contract between you and the company. Whether you can be classified as PSB.. that's up to the CRA to decide.
I've been done some reading since dlhunter posted that link.
There are some rules which they use to decide if you classify as PSB or not. But from what I understand, if you are working for only one company throughout the year and service them like an employee does (about 40hrs per week), you are likely to be classified as such.
If you provide service for more than one company, it is not likely to happen. But with CRA, you never know :)
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Deal Fanatic
Jun 27, 2007
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MarcusXP wrote: That is a contract between you and the company. Whether you can be classified as PSB.. that's up to the CRA to decide.
I've been done some reading since dlhunter posted that link.
There are some rules which they use to decide if you classify as PSB or not. But from what I understand, if you are working for only one company throughout the year and service them like an employee does (about 40hrs per week), you are likely to be classified as such.
If you provide service for more than one company, it is not likely to happen. But with CRA, you never know :)
and to add: if any single client is a considerable source of revenue, others don't matter. case in point - corporation has two clients, but one of them brings in 90% of revenue = still PSB. 5 FT employees is much safer.
Deal Addict
Mar 8, 2013
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GobiFool wrote: I work in IT and currently employed Full time with 80K annual salary with benefits like extended health, paid 3 weeks vacations etc.

I am considering switching to a contract position (Incorporated ) with a new company with an hourly rate of $55. Initially this is a 9 months contract with good possibility of extensions in future.

My colleagues tell me that I will save lot more if I go for hourly job. They say that my income taxes will be less as I can write some expenses like vehicle, meal etc. I don't need health benefits as I can get these benefits through my spouse insurances , who is full time also.

My question is that does it make sense financially to switch the job. The commuting time and working hours being almost same in both jobs. Will i be having more cash flow.
1. You will definitely have more cash flow for the first year (at least), because there will be no withholding tax.
2. I would discourage you from incorporating until you really understand the difference between sole proprietor and corporation.
3. The comment about writing off meals is not accurate. You can write off 50% of meals and 'entertainment' if you take a client (or potential client) out to dinner for the purpose of getting a contract or extension. That means if you spend $100 on dinner for 2, you will be able to claim $50, which will save you $25 in income taxes, as long as you can prove that the purpose of the meal was to generate income. This is a grey area that CRA can deny and you have already spent the $100.
4. If you do not have a special skill that puts you in demand after your initial contract, it may be difficult to get the next contract. Are you good at selling yourself? Can you handle rejection? How will your spouse react if you are sitting at home between assignments for a month or for a year? There are many factors to consider.
[OP]
Newbie
Jul 15, 2015
8 posts
York, ON
Finally, I ended up accepting the new offer. Since my current employer told me to come back to them even if there any problems. They wanted to keep me and asked if I will be interested if they increase my full time salary or the hourly rate and offer $58. I told them that I already accepted the new position.

In this situation, Can i go back to the agency and ask for more $$ or atleast match my current employer's rate. Keeping in view that I already aceepted the new offer, last week.
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Apr 29, 2008
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GobiFool wrote: Finally, I ended up accepting the new offer. Since my current employer told me to come back to them even if there any problems. They wanted to keep me and asked if I will be interested if they increase my full time salary or the hourly rate and offer $58. I told them that I already accepted the new position.

In this situation, Can i go back to the agency and ask for more $$ or atleast match my current employer's rate. Keeping in view that I already aceepted the new offer, last week.
You should have taken your employer's offer.

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