Contracting is different from consulting. As far as I understand when you are consulting you are a permanent employee of a consulting company that assigns you to various projects. When you are contracting you work for a temporary period of time exclusively for a client until your contract ends or you find better opportunities.
The first case is paid double of the permanent to the consulting company, but the employee of the consulting company is lucky if he gets as much as a normal permanent. A contractor on the other hand gets paid much more than a permanent, especially counting the less taxes that he needs to pay. There is a 3rd option when you actually own the consulting company, but then it’s up to you to find clients and if needed additional resources to assign to the various projects, but in that case you may be paid even more than contracting if you have no down time between projects.
A contractor is effectively a non-permanent employee: someone you hire for a fixed period because you have irregular work load and you need some extra people temporarily. I say effectively a non-permanent employee, but it's really skirting the edge here: if the relationship is too much like an employee, then the contractor is an employee for tax purposes.
A consultant is someone you hire for their expertise. They're a specialist; they tell you what you should be doing, rather than doing work you specify.
IT contractors are also usually employed by contracting companies that take care of accounting and other overheads, and if they do things like marketing and referral, they'll eat a significant chunk of the fees too. I don't think there's a significant difference in organizational structure between contractors and consultants in this way. It's mostly that consultants address the problem at a bigger distance, and are more likely to be drawing up the plan, rather than working on the execution.
ok, it makes sense, but then the consultant is kind of the 3rd option in my previous post but his job is to advise rather than actually do all the work, right?
I guess it depends from the country and the type of contractor.
In UK, with a limited company, you pay less taxes (at least until next April). If you are under an umbrella company you will pay more taxes because you’ll be paying all the taxes of a normal employee plus the taxes of the employer. No idea if it is different in US and other countries honestly...
It’s a very good question, and a long story. As far as I know still no one has a certain answer.
The back story is that in April 2017, if I remember correctly, all the contractors that worked for public companies were forced to be under the IR35 rule. This rule, in short, tells that the contractors are equiparable to permanent employees.
So they had to pay taxes as permanent employees, without the perks, like paid holidays, sick days and so on.
This caused a quite massive loss of public contractors, understandably.
From April next year they are implementing the same schema in the private sector, with the difference that it will be up to the employer to declare who is inside IR35 and who is not.
The mainstream theory is that employers will start putting everyone under IR35 to avoid problems with HMRC. Even if this won’t be the case at the beginning, after the first couple of high visibility cases in which hmrc punishes the employers for some wrong IR35 classification, all the others would want to avoid the risk and headaches and will classify everyone inside IR35.
We’ll see next year how it turns out, but I’m not very optimistic. Luckily for now I’m shielded, but I’m paying an eye watering amount of taxes...
But if you're self-employed (or operate a business that's a sole proprietorship) you can deduct your expenses (equipment, rent on your home office, etc.) from your taxable income. In the U.S., you attach "Schedule C" to your federal tax return to do this:
