This is a hypothetical situation and would appreciate some comments from tax experts

-Currently, A is making $90K salary income

-He commutes around 60 kms one way to work.

-He has an option to switch to a contract and make $84K, i.e. he will be treated as a contractor rather than an employee

-According to me, he would be making more net cash in hand under the contract. My contentions are due to the fact that he can deduct his commuting expenses (gas, repairs, interest, depreciation on his car) and a few home office expenses as well as he will be taxed at a lower rate since he is getting taxes as a professional. He can get him own benefits and claim tax deduction on them as well. The only issue is that he or his employer will not be paying CPP (I dont know the long term implications of this)

What do you guys think of this scenario?

T

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"The grass is not, in fact, always greener on the other side of the fence. Fences have nothing to do with it. The grass is greenest where it is watered. When crossing over fences, carry water with you and tend the grass wherever you may be"

There are reasons why contracting hourly rate is 1.5 - 2 times that of salaried rate . The reasons are insecurity and vacations+holidays ... and then there s idle time b/w contracts .

I factor in 52-4(vacation)-4(down time) = 44 weeks of effective work .. or 44*40=1760 hours ....

Now 90K should equate - 90000/1760=$51/hr or equal to 51*40*52 = 106K .. which is the equivalent figure one should be looking at when comparing 90K annual salary ...

Other things like expense writing off & tax benefits are the perks one should get for being strong in one's field to be in demand and for taking risk .....

But then there are other factors like commute to work and job satisfaction which are subjective .

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Fido.

Thanks for your response. Here the situation is slightly different. He does have an offer from another company and he is negotiating it to be a contract employment. The issue is that the money is lower than what he is making and I thought of suggesting him to go for it since being on contract, he can get all sorts of deduction and will be taxed at a lower rate compared to a salaried employee, thereby making a net cash income of more than what he would have earned as a salaried employee making $95K.

Does this make sense?

T

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"The grass is not, in fact, always greener on the other side of the fence. Fences have nothing to do with it. The grass is greenest where it is watered. When crossing over fences, carry water with you and tend the grass wherever you may be"

What about vacation - if he takes 4 weeks off , 84K will go down to 77K ...

Lower rate taxing effect is not much as either before or later , he would need to pay personal tax at the same rate .


I was in the same boat once thinking of negotiating salary for contractual compensation ... but I analyzed it was not worth it and came to lower than the applicable market hourly rate .

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Fido.

Few cents..

CPP
Do not forget CPP contribution you need to make as self employed which in your case will be 4613 for the year. otherwise For an employee half of that amount is paid by employer. YOu will get some tax credit on 50% of that amount.

Overall expense to you will be - 4613/2 = 2307 ( you are paying rest of the amount in any case as of today)

Medical / Dental Benefits
In case your employer is paying for your benefits , these insurances will be required to be bought from your own pocket. (around $3- $5 per day depending on your age, medical condition, over family expense may be 4-5k for an year )

EI
Choice will be your to go for it or not, of not then you may not get benefits loss of income during mat/paternity, sickness or compassionate care of dependent. If you go for it, total expense here will be 839$s for 2012.

and apart from above , you might face difficulty during loan / mortgage approvals. loss of job security, lack of group insurance benefits ( I save around 2k on home and car insurance ) etc.

Your contractual amount plus tax benefits from expenses should be covering above.

Take my suggestion - Prefer your first contract to be long term else do not go for it !

I second FIDO.
For a 90K salary, the contract position should be min 120K or it is not worth it, any way you look at it.
We are also forgetting Company sponsered RRSP which a company paying 90K to an employee would generally give.
Contract is for cutting edge employees and pay should be much above.
Peace

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I am a Gents and not a Ladies.