Going Contracting - Payroll Management Companies

[MrHyde]

Hi,

I am thinking about going contracting after 14 years as a permie employee of various companies. I've got an offer from a company and they've told me that I need to either get my own ABN or engage a payroll provider company. At this stage, I don't want to set up my own company, so think it will be easier and simpler to utilise a payroll management company. I've looked at a few websites and the rates seem to be about 3-4%. However, I've got a few questions?

1) Is payroll tax something that I need to deduct from my gross rate? All the online calculators seem to only deduct the management fee and superannuation from the ex GST rate. I am not going through a recruitment agency. Is the management fee tax deductible?
2) I am based in Melbourne. Are their any payroll companies that you would recommend? Its very important that the company pays out to me on time.
3) Any thing else I need to think about in terms of expenses that will further reduce my take-home pay before income tax.

Thank you for your views on this topic.

Cheers,
MrHyde

 

[bismarck]

I don't know the answer to your payroll provider questions, but if you are going to be a sole trader I don't see why you wouldn't get an ABN?

It is very easy. I got one years ago for the odd times I do individual pieces of work on the side for which I need to invoice.

EDIT: Note that you don't need to be a company (i.e. incorporated) in order to get an ABN

 

[MrHyde]

I don't know the answer to your payroll provider questions, but if you are going to be a sole trader I don't see why you wouldn't get an ABN?

It is very easy. I got one years ago for the odd times I do individual pieces of work on the side for which I need to invoice.

EDIT: Note that you don't need to be a company (i.e. incorporated) in order to get an ABN

The little bit of research I've done today suggests that sole traders can't get Workers Compensation Insurance. I haven't checked into Personal Liability and Professional Indemnity Insurances for sole traders. Also, many recruitment agencies refuse to deal with sole traders, although that is not the situation here as no recruitment agencies are involved.

 

[OzEire]

You are embarking on a major change in your personal financial circumstances. Invest a few $ into getting good professional advice from an accountant who specializes in this sort of thing, there are lots in Melbourne. It will save you money in the end, and might save you in the short term if the acct can properly structure your affairs.

You might also find that other suppliers or contractors require your ABN to deal with you (for their accounting). Its free, no ready not to. The business name costs a nominal amount p/a but you may not need that bit.

 

[Johnno101]

My suggestion is that if you can manage BAS well (I put aside a set amount each fortnight pay) then you should become a sole trader and register for GST. As said previously work with an accountant as the setup early is the important aspect (for example you could pay a spouse for work performed for the sole trader). The accountant will be less than the payroll management company and the return far greater.

 

[MrHyde]

Thanks for the suggestions so far. I'll go talk to an accountant and get things set up correctly.

I also did find out that if I went through a Payroll Management Company, I'd be slugged an additional 4.85% payroll tax on top of the 2.5% management fee. That is a lot of money that I would prefer to be in my pocket, than the governments.

Cheers.

 

[Moopere]

I also did find out that if I went through a Payroll Management Company, I'd be slugged an additional 4.85% payroll tax on top of the 2.5% management fee. That is a lot of money that I would prefer to be in my pocket, than the governments.

Mmm, something sounds fishy here. I assume the 2.5% management fee is the fee for service provided by the payroll company? If so, thats not going to the government and also seems like a hefty fee ... particularly if the gross payments are fairly large. Managing your own company will be far far cheaper if your contracting companies only want to see an ABN.

As for payroll tax at 4.85% ... I don't see why you'd be paying that either unless you are being paid an extraordinary amount (and a heartfelt good luck to you if you are

 

[MrHyde]

Mmm, something sounds fishy here. I assume the 2.5% management fee is the fee for service provided by the payroll company? If so, thats not going to the government and also seems like a hefty fee ... particularly if the gross payments are fairly large. Managing your own company will be far far cheaper if your contracting companies only want to see an ABN.

As for payroll tax at 4.85% ... I don't see why you'd be paying that either unless you are being paid an extraordinary amount (and a heartfelt good luck to you if you are

The way I understand it, the 2.5% fee covers their service fees that includes invoicing, superannuation payments, tax withholding as well as Public Liability, Professional Indemnity, Workers Compensation and other things like Salary Sacrificing. They basically act like my employer and I am on their payroll as an employee.

The payroll tax of 4.85% (in VIC) is payable by employers who have a turnover greater than $550K, which all these companies do have - so they pass on that fee to me. For me, that 4.85% is a killer - it would be cheaper for me to have my own Pty Ltd company and pay for PL, PI and WC and not pay payroll tax (from what I have learnt today) as my earnings is definately below the $550K level. The 4.85% is what is going to the government.

 

[burmans]

The way I understand it, the 2.5% fee covers their service fees that includes invoicing, superannuation payments, tax withholding as well as Public Liability, Professional Indemnity, Workers Compensation and other things like Salary Sacrificing. They basically act like my employer and I am on their payroll as an employee.

The payroll tax of 4.85% (in VIC) is payable by employers who have a turnover greater than $550K, which all these companies do have - so they pass on that fee to me. For me, that 4.85% is a killer - it would be cheaper for me to have my own Pty Ltd company and pay for PL, PI and WC and not pay payroll tax (from what I have learnt today) as my earnings is definately below the $550K level. The 4.85% is what is going to the government.

This is correct and indeed the main downside to these management companies. The 2.5%, well it depends on how you value your time. Some of these admin tasks can take a fair bit of time until you get them streamlined but you can always use an accountant for some of these.

 

[Moopere]

The way I understand it, the 2.5% fee covers their service fees that includes invoicing, superannuation payments, tax withholding as well as Public Liability, Professional Indemnity, Workers Compensation and other things like Salary Sacrificing. They basically act like my employer and I am on their payroll as an employee.

Ahh, right. I thought it was just a company that dealt with payroll

The payroll tax of 4.85% (in VIC) is payable by employers who have a turnover greater than $550K, which all these companies do have - so they pass on that fee to me.

You have to laugh (or cry...) - what a disincentive to employ people.

For me, that 4.85% is a killer - it would be cheaper for me to have my own Pty Ltd company and pay for PL, PI and WC and not pay payroll tax (from what I have learnt today) as my earnings is definately below the $550K level. The 4.85% is what is going to the government.

Indeed. I run a small P/L and its really not much of a strain. Keep a legal guy and an accountant within reach and it pretty much looks after itself at the administrative level.

 

[JohnK]

I was a contractor for just over 2 years.

I got an ABN and did my own BAS. My accountant helped with all the deductions.

 

[Timtammi]

It's not turnover that determines payroll tax it's the size if your payroll. They have a measure that for determining what is included and it does include super and other types of allowances.