income working as "contractor"

king2

http://www.flickr.com/photos/56702488@N06/5233968163/
Can anyone help me make sense of the above income breakdown. I started working part-time for a company recently who pay employees as "contractors" through an agency. I contacted the agency and they sent me the above to illustrate the way my income would be treated.I will be paying employer as well as employee prsi on top of a 5% of gross fee to the agency.

To calculate employer prsi, they take my gross income of 1400, subtract the agency fee of 70 + expenses of 55 to arrive at a figure of 1275.Are they allowed to make these deductions to the gross? I thought PRSI had to be calculated using total gross.The table was an excel document and clicking on the figure of 99.88 revealed the formula used. they arrive at the figure of 99.88 using 1275/108.5 x 8.5 which gives about 7.8%. According to SW 14 a gross figure of 1275 per month,or 1275 x 12 /52 = 294 per week, would mean that prsi should be calculated in the AO band. This states that employer prsi should be calculated at 8.5% of gross ie 1275 x 8.5% = 108.38.

Moving on to the calculation of employee prsi they use a different figure of 1175 gross for this calculation. Again they deduct expenses, agency fee and employers prsi from the gross of 1400 to arrive at 1175.Can this be done? Then they make the calculation according to the A1 band to give a figure of 71.97 when a gross figure of 1175 per month, or 1175 X 12/52 = 271 per week should be treated for prsi in the AO band which states that no employee prsi is due.

How can expenses like internet, mobile phone, stationary be Tax deductible while still paying tax and prsi as a paye worker? I was assigned an "account manager" by the agency and he stated that all amployee PRSI if working as a contractor is calculated according to A1, is this true?

barneystinson

Legally speaking in the above scenario you aren't really a contractor; you're an employee of the umbrella company. The "Gross Income" as you describe it, is the amount the agency invoices your company. That is what the €1400 is. So they will receive €1400 from the company. The rest of the payslip describes what happens to this money:

The umbrella company's fee is €70 (leaving €1330).
You are paid a gross salary of €1175.12 by the umbrella co. (leaving €154.98)
The umbrella co pay Employer's PRSI of €99.88 (8.5% of €1175.12)(leaving €55)
They pay you expenses in employment of €55 (brings you to zero).

Now, as regards the issues you raised - I'm not familiar with umbrella companies, but I don't see any reason why the PRSI system would operate any differently, and as you quite rightly have spotted, your earnings put you in class A0. I would advise you to do a couple of things: ask them to either correct your PRSI class to class A0 as it should be. If they still aren't willing to do so you can either report it to NERA and/or Social Welfare, or get them to confirm to you IN WRITING that they are deducting PRSI/Levies at class A1 from your salary, and that these deductions are being paid over to Revenue. And keep all of your payslips that should detail the employee PRSI deducted.

After the end of the year, when you get your P60, your PRSI deduction should be on it, and having satisfied yourself that it tallies with what's been deducted per your payslips, you can reclaim any overpayment from Social Welfare (but this quite frankly would be a pain in the arse and would probably take months). Obviously the real concern here has to be that the company may be telling you that they are deducting PRSI, but in fact are pocketing that money as well.

As for the tax deductible phone/internet/stationery expenses, these should be vouched, i.e. strictly speaking you should be submitting a claim to your employer for these amounts, and these claims should be based on receipts to vouch the legitimacy of the claim. In the event that you/the umbrella co are ever audited by Revenue, any liability would possibly be on you, as the person who has "claimed" the expense... (now I don't want to scaremonger here, the likelihood of you being held liable in such a situation would be minimal, based on the facts).

king2

Thanks for your response Barney, I was talking to my "account manager" assigned by the umbrella company/agency or whatever they are and he couldnt explain anything satisfactorily only to say that I was getting a "good deal" being able to keep 82.72% of my income, that some people only retained 60%! I told him if I was being assessed under normal paye I would be keeping 95%. He was also adamant that all contractors pay PRSI in A1 class and that he could show me where this was stated on the revenue site. He didnt get the chance though because he annoyed me so much with his fast talk and rail roading pitch that I told him I wanted someone else to manage my account. I have not contacted my new account manager yet.

As you say the 99.88 employer prsi is 8.5% of €1175.12.Why do they use 1275/108.5 x 8.5 to arrive at this? just to cause confusion I suppose. I know that many of my colleagues are submitting alot of expenses mostly fictional, in order to make up the loss in income caused by having to pay employer prsi and the agency fee. While the agency states you have to submit receipts for expenses, I understand that most of the guys dont and that the agency doesnt come looking for them

barneystinson

king2 wrote: »

Thanks for your response Barney, I was talking to my "account manager" assigned by the umbrella company/agency or whatever they are and he couldnt explain anything satisfactorily only to say that I was getting a "good deal" being able to keep 82.72% of my income, that some people only retained 60%! I told him if I was being assessed under normal paye I would be keeping 95%. He was also adamant that all contractors pay PRSI in A1 class and that he could show me where this was stated on the revenue site. He didnt get the chance though because he annoyed me so much with his fast talk and rail roading pitch that I told him I wanted someone else to manage my account. I have not contacted my new account manager yet.

As you say the 99.88 employer prsi is 8.5% of €1175.12.Why do they use 1275/108.5 x 8.5 to arrive at this? just to cause confusion I suppose. I know that many of my colleagues are submitting alot of expenses mostly fictional, in order to make up the loss in income caused by having to pay employer prsi and the agency fee. While the agency states you have to submit receipts for expenses, I understand that most of the guys dont and that the agency doesnt come looking for them

The employers' PRSI is based on the Gross Pay of the employee, if you consider that everything has to be covered out of the €1400 top-line figure, then they have to net the amount back. If they paid you a Gross Pay of €1,275, then they would be liable for 8.5% of that, and obviously the whole thing wouldn't work (€1275 + €108.38 = €1383.38, leaving only €16.62 out of the €1400, and thats before any "expenses" are paid to you the employee.)

As regards the thing with the expenses, if these expenses are being based on a claim that the employees (or "contractors" as they incorrectly refer to ye) have submitted, then you have to be very careful about what you are claiming, as there are very few expenses that can legitimately claimed in a normal employment situation. I mean, if you weren't able to claim any expenses when you were directly employed, then why would you suddenly be entitled to them now if you are still performing the same job, and still a PAYE employee (which you clearly are, as they are operating PAYE and A class PRSI). As you have pointed out these expense claims are merely a kind of "sweetener" to help the "contractor" to bring back up their net pay a bit, by classifying a portion of the money as expenses, rather than salary as it should actually.

Without getting up on my high horse about how I feel about the existence of these agencies (effectively as a buffer to protect employers from having to meet the legal responsibilities imposed on employers), I'm very concerned about what this account manager has said to you in relation to the PRSI. Now, I'm not a social welfare expert by any means, but any payroll calculation I've ever seen in nearly ten years applies only one PRSI class - if the employers PRSI is based on Class A0 (as in your case), then the Employee's contribution HAS TO be calculated based on the same class.

Now I realise that in your situation if you are to point this out to them, they may very well turn around and apply class A1 employer's PRSI too (meaning the calculation becomes €1275/110.75 x 10.75) and meaning your pay comes down even more. HOWEVER this would be completely incorrect, as your income clearly puts you in the A0 class for PRSI.

The PRSI system is actually fairly simple, to the extent that everything fits fairly neatly into a particular box. So in your situation it's very clear you belong in class A0, they can dress it up whatever way they like, but the fact is that you are a PAYE employee, and I would again strongly advise that you request that they explain to you in writing why they are applying a class A1 employee's deduction to your salary.

As an aside, the alternative to you being employed by the agency, is that you could actually be a contractor, within the proper meaning of the word; self employed and contracted through the agency. I don't know whether this is actually an option available to you? The pro's are that the agency just have to charge their fee and then hand you the rest of the money. The con's are that you would be self-employed, so wouldn't have any of the rights of an employee; no PAYE tax credit (worth €1650 next year), no class A PRSI contribution (and less Social welfare benefits), responsibility for filing your self employed tax return etc...

king2

I have since heard from the agency and they have said that the employee prsi in the example had been incorrectly calculated and that in fact should have been calculated in the AO band and no employee prsi would have been due. It would make you wonder though how many people on their books are having too much deducted, if some of their "account managers" do not know how to calculate prsi correctly.

I think they are trying to make the expenses claims look the same as the way an ordinary PAYE worker would claim expenses. for example in my last job I was under normal paye, sometimes I would have to go abroad for work and might have to pay for the accomodation or fares myself with my own credit card, I would then submit a receipt to the wages dept and receive the amount I paid back with my pay, separate from gross and not liable to tax or prsi obviously.

Ive researched this umbrella company thing a bit on the net and it appears to be fairly common both here, the UK and US. Contractors approach an agency and are assigned to and become "members" of a LTD company, set up by the agency and with the same address as in our case.This is cheaper than setting up their own ltd company.

My brother worked in IT as a Contractor with his own ltd company.The main benefits to him over being an ordinary employee were higher rates of pay, being able to claim back vat,expenses and variety of work with frequent change of jobs. He was also self employed. fees to set up and maintain the ltd company were fairly expensive though. I cant see why anyone would want to be part of an umbrella company as you are still an employee, paying employer as well as employee prsi, cannot claim back vat, no advantages at all over being an ordinary employee as far as I can see.