6 Ways to Reap the Financial Benefits of Procurement Contract Work

April 25, 2013

Recently we wrote about “5 Reasons Why Contract Work…is a viable Permanent Alternative…” (yes worth a read if you didn’t catch it the first time round) as an alternative to permanent employment for Procurement and Supply Chain professionals. We discussed the many lifestyle advantages (job flexibility, work/life balance, ability to work on a variety of projects in a variety of industries) as well as the all-important financial benefits that go along with this lifestyle. Many IT professionals have worked as consultants or contractors for more than 20 years and enjoyed the rewards of sole proprietorship and incorporation. With the market in Procurement hiring changing towards more contract, project-based highly strategic and implementation work, Procurement/Strategic Sourcing professionals are finally able to enjoy the same as they become some of the most highly sought-after talent in the new Permanent workforce category of Contingent Staffing.

So let’s drill down for you into the specifics of some of those great financial gains and benefits and discuss how these actually play out in practice for someone working as a Procurement contractor over the more traditional permanent roles of the past.

Make (a lot) More Money Up Front:

There’s a perception that contractors live unstable, financially insecure lifestyles. In fact, contractors DO get paid way more over the duration of a contract than the equivalent permanent employee would be over the same time period, usually up to 20-40% more sometimes even higher. That’s nice… The reason for this has to do with business psychology. Companies see less of a financial risk in compensating you highly if the requirement they are hiring for is for a fixed term. For a permanent hire, a company must consider employment equity within the organisation and as such they are limited by how flexible they can be when they make an offer to an new hire. They will also look at a candidate’s salary as well as bonuses and benefits and multiply these over a number of years they might be there, and rightfully consider this a more onerous investment. With that come the issues associated with what would have to be paid out to terminate in the event of work shortage or poor performance.

However, in a contract situation, the expenditure often does not come from the same financial bucket so many of the same issues and concerns do not apply. Additionally, companies are hiring for a fixed time and can see the end of their initial investment up front. As a fixed term, typically 3, 6, 12 months or more, the organisation has less exposure as they are not hiring an employee but a service. So a company is more likely to offer a contractor a higher hourly bill rate to attract the best talent and this is often at a premium because the company knows that they must do so to attract the best from a smaller pool (but growing very fast) of top quality people who are contracting as a choice rather than a roster of permanent employees.

We see this every day. If one looks at ones hourly bill rate as a contractor and multiplies it over a year, time and time again the total yearly income is higher than one would receive in a similar role as a permanent employee. So that extra money earned provides a great cushion for selecting just the right contract to move onto at the completion of the last one.

Be Your Own Business – – Your Own Boss:

Here’s the big one. As a contractor, you can Incorporate or register yourself as a Sole Proprietor and enjoy many great tax advantages. Any way you slice it, it’s better to be your own business than it is to be an employee. We work in tandem with Wall & Associates, a well respected accounting firm that has spent 20 years advising independent contractors in the IT space for example (they have worked to onboard some of our Procurement contractors as they move to contract). It costs a few hundred dollars to set up a personal corporation, but personal incorporation is one of the greatest tax strategies available in Canada. Here’s why:

  • Reduce Your Tax Rate: Income that you leave in your corporation will be taxed at approx. 20%, compared to personal tax rates as high as 40% or 50% as an employee.
  • Deduct Business Expenses: You can deduct taxes on expenses related to your work. This can include vehicle mileage, cell phone usage, etc.
  • Save for Retirement: Money left in your corporation can be used to develop a corporate investment portfolio that can provide you a pension income, at a lower tax rate than personal income as an employee.
  • Save on Employment Insurance Premiums
  • “Smooth” out income over multiple years: Say you make $150,000 in a contract one year, and $0 the next year, you can pull the income out of your corporation at $75,000 per year, resulting in lower overall taxes and less stress for you as a Procurement contractor.

These are just a few ways in which you can use personal incorporation to maximize your income, minimize your taxes and push it even farther ahead of what you would be earning in a permanent role. Here’s an example:

Say you’ve earned $150,000 in a permanent role. You’ve had a good year. According to Ernst & Young‘s income tax calculator, your after-tax income in Ontario would be $100,855.

Say you’ve earned $150,000 in a Procurement contract as an incorporated consultant. You’ve JUST HAD a better year. According to Wall & Associates, (after RRSP contributions, business expense deductions, and money left in your corporation) your total after tax income could be as high as $130,540.

So the benefits are obvious. Stay tuned over the coming weeks when we will discuss further advantages to the contract lifestyle for Procurement and Supply Chain. If you have any more questions about setting yourself up for success as a Procurement consultant, please don’t hesitate to give us a call at 416 364 9919. Contracting in Strategic Sourcing is certainly the way to go. Over 50% of our most exciting requirements are contract – don’t miss out.

You can also explore our current contract opportunities here.

 

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