Are you making the switch from employee to independent contractor?
Well the first time stepping into your own business can be daunting however these are 5 steps to help you get this new phase of your career started on the right foot.
1. Sit down with an accountant – sure you could just go online and get an ABN, however do you set up a family trust to distribute income to other family members for more tax effective earnings? Are you planning on growing? Will you have employees later? All these and more are scenarios you can run through with an accountant to ensure your business is set up to suit you needs now and into the future whilst maximising your tax effectiveness. Sure you may pay a few hundred extra speaking to an accountant however chances are you will save this on the back end ten fold.
2. Ensure any contract you enter into is reviewed by an appropriate third party – Some bigger companies out there will lure individuals and smaller companies to sign contracts which expose them to a lot of the liability whilst the big company holds little or no liability. Depending on the set up of your company and your contract this may even put some of your personal assets including your home on the line if something goes wrong. A lawyer or even some insurance brokers can offer a contract review service to ensure your not exposing yourself to these liabilities, and if you are you are 100% aware of what they are.
3. Don’t forget your super – as an independent contractor you need to be paid considerably more than you were as an employee just to equal what you were on after super. A lot of independent contractors forget this. You may be earning more now however the guy doing the same job for 30 years as an employee will end up retiring with 10% of his wage compounded yearly for that whole time and unless you took control to pay your own super, you will have nothing – not a cent! You should consider putting aside at least the 10% of your pay into your super account in order to prepare for your retirement. Speaking with a financial planner is generally free, and they can help you plan for your retirement throughout your career.
4. Don’t spend your tax – now this is what gets a lot of independent contractors into trouble. When you come from being an employee you’re used to spending every cent you get paid. When you’re out on your own you have to manage your own GST and PAYG tax for the money that you earn. Many people wind up in a mountain of tax debt because they spend most of their pays and have nothing left for tax. 2 simple tips to consider if you’re not good with managing this aspect of your business.
- Start a separate tax, super & GST account and put enough of what you receive into it to pay your super, income tax, and GST. You may need to put aside 50% or more – a good accountant can help determine how much you’ll need. If you have any left over leave this in that account, you may need it if you’re sick.
- If you can’t manage to do that or keep getting behind get a bookkeeper to manage it for you so the only money that hits your account is that which you can spend.
5. Ensure your insurance is in place – make sure you have the policies which you are contractually obliged to have as well as discussing with your insurance broker any other insurance policies that you may require such as Personal Accident and Illness or Professional Indemnity Insurance. An insurance broker will give you help and advice based on your business where as insurers will only give you limited bias advice based on the products they offer, best to stick with a broker.
You have embarked on a journey which if done right, you will never look back however if you don’t take some of the above into consideration you could spend years repaying debt and be in a worse position than when you started.
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This blog is not intended to be advice and you should not rely on it as a substitute for any form of advice.