How to work as a contractor?

[Hero_X]

Hey beyond,

So I may be in a situation where I might get to return to my engineering field. The company that I applied to, is only taking contractors at this time. I've never worked as a contractor. So I had a few questions:

1) How do you set yourself up as a 'contractor' ?

2) What's the major difference between staff and contractor?

3) With a field like engineering, how does practice insurance work for the company [for the work that I'd be doing] ?

4) What would I need to prepare for, in terms of costs / savings ?

5) I've heard that being a contractor you get taxed less, and are able to claim a lot of expenses as 'business expenses'. How would this work? Would I need an account to get all this dealt with?

I'm very new to this type of employment so I really could use your advice. Please share your experience / thoughts. Thank you!

[firebane]

Contractor you are basically self employed and selling your services to them. All business doings are from you which means you need to look after your own insurance, taxes etc etc.

[shakalaka]

I would assume you would need to get your own GST number or incorporate.

Then you do invoices and collect GST. You write off all business related expenses, or your accountant will. Can't tell you about insurance, probably through your governing society if I had to guess.

[colinxx235]

Hey Hero,

I hit this cross road about 2 years ago after a long layoff returning to Engineering. I'll do my best to answer the questions.
So you have two main options usually. Sole Proprietorship (what I went) or Incorporated. I went SP because it was much cheaper to set up initially and with the volatility of the industry I dind't want to spend all the time and money setting up Inc if it wasn't going to last.

Sole - https://www.canada.ca/en/revenue-age...ietorship.html
That read will tell you all you need to know. It is cheap, you just invoice directly, I did my taxes like normal with a few small writeoffs.

1) If you go Sole, hit link above and follow steps. Apply for a GST number, to keep Apega off your ass I would list myself as a "project manager/project support services" for example for either direction you go in. This is very common among Engineers. Incorporated you will typically need to talk to a lawyer, usually get an off the shelf numbered company and yes set up with an accountant to manage that (dividends etc etc). Most companies with contractors invoice monthly, so you just make a standard template to send in such as. Hero_X Project Consulting Services Invoice, XX hours @ xx rate, then include a gst column.

2) Staff the company pays all your EI, benefits, CPP, stat holidays, vacation etc. Consulting you have to set up everything yourself. Stats work or don't get paid, vacation take at your own leisure as again you don't get paid. The uplift for a standard engineer of 3-4weeks vacation going from staff to contractor is ~ 16-19% to break even IIRC. Some firms used to pay 30%+ for contractors and on top of all the old dodgy write offs/tax work arounds that is why so many were contractors. CRA has clamped down heavy on this. Market volatility is why everyone wants contractors, less cost/fees for them and super easy to let you go without paperwork.

3) Same as usual, pay your Apega dues. Maybe if the company is nice you can expense your dues, varies as a contractor/employer. You typically permit under the company that you are working for. If you are expected to be a permit the drawings yourself then you will definitely need to be incorporated and wayyyyyyy more work to get permitted under alberta versus being a contracting P.Eng.

4) The smartest thing to do is estimate your tax bracket and track all your gst charges, set that % aside + the gst into a separate account as most of the will go to taxes minus a few writeoffs if you choose so (home office, business expenses, etc)

5) As an SP I just used the Turbo Tax business one for $50 (or whatever it is) every March as I also had mixes of employment + contractor in there. Wrote off a tiny bit for home office, fees etc. It isn't a large amount being an SP. Incorporated is where you can get more creative with taxes/dividends but as I mentioned CRA is clamping down hard on it. Works better if you have more than 1 Engineer in the company and multiple clients.


But overall it isn't too bad. As an SP you just got used to invoicing monthly, tracking major expenses, setting aside earning for taxes + gst and just file it year end the same as you would personal tax. Very easy to set up and low cost.

[ExtraSlow]

Errors and ommisions insurance is what you'd need, and it's shockingly expensive.

If your contracting income is somewhat sporadic, there are benefits to being incorporated, because you can choose to pay yourself in a different schedule than when the company makes money.

[Hero_X]

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Errors and ommisions insurance is what you'd need, and it's shockingly expensive.

If your contracting income is somewhat sporadic, there are benefits to being incorporated, because you can choose to pay yourself in a different schedule than when the company makes money.

So the hiring company, would not provide any insurance on ommissions/errors ?

How does this work if you're with an agency like Design group?

[Nufy]

I've been working as a contractor for the last 10 years or so...

I've only been asked to carry insurance once. The job lasted 3 months

Other than WCB of course.

Every other time I confirm that I am covered under the employers Liability insurance.

Isn't it a requirement of their Permit to Practice ???

[ercchry]

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Errors and ommisions insurance is what you'd need, and it's shockingly expensive.

If your contracting income is somewhat sporadic, there are benefits to being incorporated, because you can choose to pay yourself in a different schedule than when the company makes money.

Weird... our coverage is around $200/yr, not engineering though... guess our liability usually doesn’t exceed more than $1m... but some people’s can be a lot more

[killramos]

I would clarify with the person offering you the job as to whether they intend for you to be an independent contractor or a contract term employee. They might not care but maybe they do, this will affect whether you get paid out through payroll or whether you invoice them.

What they are really trying to avoid with bringing you on FT is liabilities such as STI, LTI, Severence that they have to pay out if things dry up and they need to let you go. All that gets factored into your total cash comp as a contractor.

Expensing things is only really relevant if you are spending a bunch of money in the course of the job. If you are showing up to sit at a cube and do work there isn’t really much to expense. Insurrance is an interesting one and something to discuss with the employer as others have said and it will vary place to place.

[brandon]

Also, keep in mind that the CRA heavily looks for contractor corporations with only one customer. So best to have some other companies you can bill some invoices too as well.

[lasimmon]

Incorporating makes very little sense for the majority of single contractors these days.

[jwslam]

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What they are really trying to avoid with bringing you on FT is liabilities such as STI

Well then I wouldn't want to work there anyways.

I've had to deal with setting up a few independent contractors at my work. They all require $10mm liability.

[Mitsu3000gt]

Some people love it but I personally wouldn't do it again based on my experiences anyway (my experience is with O&G). The hourly rate you have to charge to offset an equivalent salaried employee's compensation is often a lot higher than they want to pay. You need your hourly rate to compensate you equally for your expected salary PLUS:

- Bonus/STIP if applicable (likely 15%-20%+ or whatever you would expect as a salaried employee)
- Full benefits package if applicable (Health spending, personal spending, the usual $500+ for massage, chiro, physio and a couple dozen others, travel / drug / dental, etc. etc.) This can add up to many thousands of dollars of benefit. Usually the ones you buy for yourself as a contractor aren't nearly as good, and have a long mandatory waiting period before start.
- Any RRSP matching (often 5%-9%)
- Any stock/share based or other long term incentive programs they have
- 3-4+ weeks paid holiday, flex days, bonus days, half day Fridays, etc. (whatever they get)
- The general flexibility of a salaried job (i.e. days you get let out early, need to run to a quick personal appointment, etc.) while still getting paid
- Generally better job security and not being the first to go if they do layoffs

Also personally I did not like the effort required to incorporate, deal with all the write-offs, doing taxes is annoying (or expensive), CPP/EI deductions, looking for loopholes, keeping perfect records and every receipt for absolutely everything, etc. Some people are very good at this and contracting makes more sense for them.

I'd never do it again unless they pay was ludicrous.

[gmc72]

This is a very interesting thread. My father was laid off 25 years ago and became a contractor (O&G Instrumentation) ans was never out of work until he retired. My mom didn't work, so the income splitting helped and it worked for them. My EI claim has run out now and I am looking at doing this as I am currently an hourly employee (no benefits, no holidays, no sick days) and am basically a contractor without the advantage of writing off certain things. There are some interesting opinions either way.

[Hero_X]

The thing is, I've been out of engineering for almost 3 years now. I was laid off in 2015. I'm quite desperate to enter back into industry, and start gaining experience again. I was laid off when I only had about 4 years, so the past 3 yrs i've been treated as an unwanted leper by companies when I apply for jobs.

If I had a choice, I would want to be a staff hire, but, seems this opportunity won't let that happen, at this time at least. I am quite concerned about the whole lack of health benefits, as I really do need them.

That being said, the pay will be at least 70% better than what I'm getting now.

A lot of you have mentioned things about tax & write offs. I've also heard that working as a contractor you get taxed less. How does this even work? If you're a 'company' and then you pay yourself, that payment of self essentially is taxed as normal income tax isn't it?
@gmc72 : How did being a contractor get him consistent work? I"m curious because if the work isn't there, shouldn't both staff & contractor positions be scarce?

[colinxx235]

You'll just have to get your own benefits. Search around for blue cross, great life etc etc for single plans. Obviously you won't be getting any major glamorous 100% coverage with full practitioner, HSA etc. But for a soso amount you can cover basic medication/health care etc.

I would highly recommend you do what I did and just be an SP, don't worry about dividends/taxes and get Inc. You're not specialized, will only have 1 client, will be working in an office setting (i'm assuming) with very little expenses. If at some point later going Inc is an option that benefits you greatly it is quick to do.

And ultimately if there is no work I don't care if you are staff or contractor it doesn't matter. Staff just means you qualify for EI and they owe you severance etc etc. Which is why so many companies in yyc for Engineers are doing Contractor only (at least to start). If it doesn't work out they have almost no onloading/offloading costs.


Edit: Oh as well you can no longer do the major income splitting under Inc that GMC is referring to. Trudeau cracked down on that BIG time. Long gone is the "oh my wife is my accoutant and 50/50 split". If you get audited which I've been told is happening more frequently better be ready to prove that she commits whatever % is allocated to her for example. And also if his dad was a senior Instrumentation Engineer and good at his job, there is a reason he would never have been short on work...

[killramos]

That involves incorporating, paying business taxes, then paying yourself a dividend as business owner. Which can have some tax benefits. But CRA has been getting more stringent with that and it involves a lot of work in organizing the business. You don’t have to pay yourself a salary in that case and just declare a company dividend which you pocket.

If you are concerned about benefits then buy them, such is life lots of jobs don’t have benefits.

Honestly just ask your employer how they want you to structure it. You are free to just declare it as income to a SP and be done with it.

You would be silly not to take the work just because the position is contract.

[lasimmon]

There isn't value in incorporating anymore - that is if you want to do everything above board. Go Sole Prop. its quick and easy and can be set up in an afternoon.

[gmc72]

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@gmc72 : How did being a contractor get him consistent work? I"m curious because if the work isn't there, shouldn't both staff & contractor positions be scarce?

I know that he switched companies a lot. If he heard of work, he would apply. It took a lot of networking, but it worked for him. I guess that the companies were looking for contractors and not staff.

[HiTempguy1]

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This is a very interesting thread. My father was laid off 25 years ago and became a contractor (O&G Instrumentation) ans was never out of work until he retired.

I don't mean this as insulting or being mean in any way, but there is a lot of crappy work out there. Trades contracting in O&G is the worst, only time I've ever seen it make sense is working onsite at a plant during construction/commissioning when they were paying top dollar.

Otherwise, typically overall pay once everything is factored in is better as an employee and you get stability. This was the path lots of people tried to take, get on a site contracting, during the handover of the plant to the producer get noticed for good work, get a job offer.

As Mitsu highlighted as well, contracting is way more intensive than being an employee. Sure, sometimes its very simple and straightforward, but it starts to become very time intensive if doing everything yourself.