And before you roll your eyes, it is very important.
If you are working on contract through an employment agency (not just IEA of course) you are covered for all workers compensation, public liabilities and your tax and superannuation payments are paid by us.
Say however, you have been on contract to a host employer, the contract ends and a little while later they contact you directly asking you to do some extra work for them. You MUST ensure they are going to cover you for all of the above. You MUST have a contract that states this in writing.
What happens if they don’t give you a contract directly?
You have several options open to you:
Decline their offer of work until the paperwork is put into place. And please do not think about undertaking the work without a contract. What happens if you have an accident at work, or cause an accident to another party? YOU will be liable.
Advise them to speak to an employment agency so they can take care of the administration of the contract on yours and their behalf.
Become a sub-contractor.
However, there are some things to think about if you are going down this particular route:
You need an ABN
If you earn more than $75,000 per year (gross) you need to also be registered for GST (goods and services tax)
You will need to organise PAYG (Pay as You Go Income Tax) which is based on an assessment of prior and future earnings. This will need to be paid either annually or quarterly you can nominate.
You will also need to organise and pay your BAS (Business Activity Statement) this is also paid quarterly.
You also have to make provision for your own superannuation payments.
If that isn’t all, you also need to provide the following:
Evidence of Workers Compensation and / or Income Protection
Public Liabilities and Professional Indemnity Insurance of between 5 -10 million dollars (you may also need to consider aggregates ie., someone making more than one claim against your professional capabilities in a calendar year). Depending on which organisation you work for these figures may not be adequate and each contract should be read VERY carefully.
All that being said how on earth do you calculate your hourly rate?
Let’s use ALIA’s formula for casual employees requiring 25% loading on the annual salary to calculate an hourly rate for a librarian wanting to earn $50,000 per annum. Remember the 25% is to cover sick leave and annual leave entitlements, which you will not accumulate as a casual, and you certainly won’t accumulate them as a freelancer. So using the formula you should be charging a minimum of $31.51 per hour.
[minimum annual salary] x 1.25
52.2 x [hours in a standard week]
50,000 x 1.25
52.2 x 38
$31.51 per hour
Examples can be found at http://www.alia.org.au/employment/salary.scales/2002-2003/casual.part-time.html
This covers your leave entitlements but what about the 9% superannuation contribution that employers make? If you add that to your hourly rate you should now be charging $34.34 per hour. Please note also, this is set to rise to 12% over the next couple of years and needs to be taken into consideration.
How many unpaid hours do you put in to your business? Have you considered those when determining your worth? How much time do you spend on the administration of the work you do for your client/s? – Timesheets, invoicing, chasing up payments, bookkeeping and accounts. In my experience a freelancer generally can expect to add about 10 20% to their paid working time. In other words if I work (and I am paid for) a 30 hour week I can expect to actually work a 33 to 36 hour week i.e. 3 to 6 hours of unpaid work to keep my accounts up-to-date. This may even be increased a little if you’ve got GST to worry about. If you are working for more than one client have you taken into consideration the telephone conversations you may have with your clients that are not part of your paid working hours?
Do you charge them for this time or give it them as good will? Again, if working for more than one client what kind of record keeping do you have in place to ensure that you are up-to-date with the client’s requirements? Have you costed the time taken to maintain the records into your worth or do you perform these tasks as unpaid hours?
Do you have professional indemnity and public liability insurance? How much per year does it cost? Let’s assume it costs $1,500 per annum and that’s conservative it therefore costs $28.74 per week. How many hours per week are you working? If you are working a 38-hour week, you need to add another 75 cents onto your hourly rate to cover your insurance cost. You are not covered by your client’s workers compensation, so do you have income protection or workers compensation insurance? How much does it cost? Do the same calculation as you did for public liability for your workers compensation and/or income protection and add it to your hourly rate. How much have you invested in equipment that you use to support your business: – PC, modem, printers, mobile telephone, and car? How much do you spend on consumables: – paper, toner, electricity, telephone calls, postage, fuel?
Now think about what benefits you get from being a freelancer. I have had conversations with people who have said that the tax benefits of claiming their vehicle, equipment etc. means that they can charge less. How does the taxation system on personal services income affect you? The tax benefits may not be so good if you work for only one client. Also think about the quality of life benefits you get from being a freelancer ability to stay at home with the sick children, choices of when to work these benefits are hard to value in a monetary way but still have significant value to all of us.
Realistically, if you are a freelancer and you want to earn a wage equivalent to a person in a permanent position then you have to know what all your expenses and benefits are and charge accordingly.
Why are many companies choosing to use freelance contractors over agencies and permanent placements? Because most freelance contractors don’t know their worth and significantly undercharge.
At the end of the day you think you are getting a good deal by invoicing at a rate of $31.51 per hour but when you take all other costs into consideration you are more than likely earning less than $20 per hour.
One final point to remember if thinking about becoming an independent contractor is the 80/20 rule. If 80% of your money comes from one income source the tax office may determine that you are not an independent contractor at all but an employee.