One of the most difficult aspects of moving into contract work is learning how to manage your cash responsibly. Usually, contractors are paid above-average rates, due to the short-term nature of their work. It can be exciting to see how much is paid for just a few hours, or days, of work, but it is important to remember that this money needs to be budgeted and spread out, as there won’t always be work available.
Budgeting is an important part of making contract work a sustainable employment option, but it doesn’t end there. Ensuring you are paying the correct tax, and claiming all the relief available to you, is instrumental in making contract work a success. But the tax system can be confusing and hard to navigate, making it easy for people to miss out on opportunities for relief. Below, we look at some of the tax relief available to contractors that could make a big difference to your take-home pay.
Travel is probably the most well-known allowable expense, but there are a few important things to note to avoid claiming relief where it is not allowed. Travel is an allowable expense when the journey is intended to advance the interests of the business. Travel to a client’s premises, a training course, or a business conference would all fall under this category. The cost of these trips can be reimbursed, tax-free, using either the actual cost of travel, or rates no higher than those offered to civil servants. If the trip is made using public transport, then the cost of the tickets can be reimbursed tax-free.
It should be noted that if you rent a working space, travel between home and here is not an allowable expense.
Depending on the nature of your contract work, you may or may not have what is considered a “normal place of work”. For example, a freelance web designer would likely work from home or in a shared office space, while a freelance plumber is unlikely to spend more than a few days at the same location.
If you do have a normal place of work, and need to leave that location for work-related reasons, you could be entitled to claim a subsistence allowance. Similar to allowable travel expenses, subsistence payments can be made tax-free either at cost or calculated using civil servant rates. The only requirements are that the destination is beyond a certain distance from both home and the normal place of work, and that the trip lasts a minimum length of time e.g. 100km is the minimum distance for an overnight trip.
Rent & Utilities
“If you normally work from home, then it may come as a nice surprise to learn that you can claim tax relief on a portion of both your rent and your utility bills.”
The easiest way to claim for these expenses, which will suffice for most people, is to compare the square footage of your working space to the overall square footage of your home, and claim that proportion as a business expense. So if your office takes up 15% of your home, you can claim relief on 15% of your rent, broadband, electricity, and so on.
In some cases, the fact that you are working from home may mean you require more than just an office. A carpenter, for example, would require more space, such as a garage or workshop. In this case, you can claim relief on the rent difference between properties without such a space, and your own property, as it is clear that the difference is a result of business operations.
Wages & Fees
As a contractor, you are highly likely to engage the services of legal and financial professionals at some point. You may also be required to bring in additional staff for some jobs, but not for others. Regardless of whether you are paying someone to handle your business affairs, or to actually provide labour/services, you can claim relief on any money you pay for people to carry out work on your behalf. This includes salaries, recruitment costs, insurance contributions, consultation fees, and in some cases, bonuses. However, you cannot claim tax relief for your own salary or for an owner’s draw.
One of the disadvantages of being a contractor is that you don’t have access to the same resources that larger businesses would. For this reason, it is quite common that a contractor may be required to lease a vehicle or piece of equipment on a short-term basis. As long as the item in question is being leased for business purposes, you can claim relief on any of the payments made for it.
Running & Repair
For any equipment you do own, you will be pleased to learn that you can claim relief against any cost associated with keeping the equipment running and operational. It doesn’t matter if the machine needs to be filled with paper or petrol, if you need to purchase something for it to work, you can claim tax relief on those purchases.
If you do employ other people, it is good to know about the small benefits relief. This allows you to give a one-off, non-cash gift worth up to €500, tax-free every year. The gift cannot be cash or directly exchangeable for cash, and while a gift can be up to €500 in value, only the first gift given will be exempt from tax, meaning you cannot spread this throughout the year.
There are a lot of challenges associated with contract work, with many of them being financial in nature. There will not always be a steady flow of cash or work available, so managing your cash flow is critical to your success. Fortunately, the government does offer support in a lot of different areas, so make sure you review the tax relief available to you, to ensure that you’re not paying too much and harming your chances of succeeding in the long run.