IT Contracting: Compensation, Benefits, and Insights

Key Takeaways:

• IT contractors usually work on short-term projects, earning a base salary upon project completion, but without the benefits provided to full-time employees.
• IT contracting is ideal for individuals who seek to earn a high income quickly, but it comes with the trade-off of job security. Let’s explore with ERA the key factors to consider when choosing this type of work.

What is IT Contracting?

IT contracting is the practice of hiring skilled IT professionals or contractors for specific projects or phases. This approach helps companies to bring in specialized expertise without long-term commitments. Common roles include Software Developers, System Administrators, and IT Consultants.

What is contracting? Source: toponseek.com

A recent three-fold increase in tech contract jobs signals a shift towards independent contracting, benefiting both companies and contractors.

Companies gain access to essential skills on demand, with the flexibility to adjust their workforce as needs change. At the same time, contractors enjoy greater flexibility and the chance to collaborate with multiple organizations. This contributes to addressing global skill shortages.

Differences Between Contractors and Full-Time Employees

Now that we understand “what is an IT contractor?” Let’s explore the differences between contractors vs full-time employees, focusing on job duration, job security, and work arrangements.

Contractors are hired on a temporary basis for specific projects, offering flexible and often remote work setups but with limited job security and benefits. In contrast, full-time employees enjoy ongoing employment with benefits like health insurance and pension plans, typically working on-site with fixed schedules.

Compensation Comparison

1. Base Salary:

IT contractors generally receive significantly higher base salaries compared to full-time employees. Their rates reflect project-based work and no benefits.

For example, IT contractors have an average yearly earnings of around $70,000, compared to a full-time IT worker’s average of around $66,000, according to estimates from Glassdoor.

What this translates to is that the contractor has the potential to earn more in an hour for usually a shorter period. However, this comes at the cost of job security and other benefits typically associated with full-time employment.

IT contractors typically earn much higher base salaries than full-time employees.

 Source: method.me

2. Benefits Packages:

In return for their long-term commitment to the company, a full-time employee receives an extensive benefits package. This package includes retirement plans, health insurance, and paid time off.

In contrast, contractors are usually excluded from these benefits and have to provide their own health insurance, retirement plans, and time off.

3. Allowances:

Allowances apart from the salary package are usually given to full-time employees. These may include travel and business expenses, equipment allowances for laptops, or even phone allowances. This is what contractors typically do not get as part of their usual pay.

That said, contractors can negotiate allowances with clients, especially for larger or longer-term projects. They may negotiate a traveling allowance if frequent site visits are expected or an equipment allowance to buy software, for example, that is needed for the job.

In some cases, contractors may negotiate allowances with customers. Source: profitresources.com

4. Bonuses and Incentives:

For full-time employees, bonuses are often based on a mix of individual performance and overall company performance. These bonuses typically have a long-term focus. In addition, there are recurring and highly probable bonuses given at periodic intervals throughout the year.

There is less likelihood of a bonus for contractors. If bonuses are offered, they are project milestone-oriented based on the completion of selected tasks or project phases, according to the agreement in the contract.

Why Compensation Differences Exist

1. Nature of Work:

IT contracting is usually hired for short-term projects or specific tasks. Once a project is completed, the contractors must secure new employment with no guarantee of future work.

In addition, contractors face more uncertainty than permanent employees. While employees typically enjoy a steady income and benefits package, contractors must manage their own benefits and bear the risk of gaps between contracts. To offset this risk, contractors often negotiate higher pay rates.

What is contracting? IT contractors are hired for short-term projects or tasks. Source: onlinedegrees.sandiego.edu

2. Market Demand and Skills:

With technology ever-evolving, specialized IT contractors will be needed for AI, blockchain, and cloud computing, among others that include the use of programming languages like Python. Gartner predicts that by 2025, over half of enterprise IT spending in major markets will be directed toward cloud solutions, further fueling the need for experts in these areas.

This enables IT contractors with deep expertise in emerging niches to command a higher wage. In fact, it may be the only viable option for companies needing specific expertise. In contrast, companies generally hire full-time employees for broader roles that do not require such a high degree of specialization.

3. Cost of Employment:

The hourly wages of a contractor are usually marginally higher than the fixed salary of full-time employees. Still, some firms prefer to hire independent contractors because the salary structure is straightforward. This eliminates several other hidden costs.

In contrast, for full-time employees, taxes, extra benefits, insurance, and other expenses add up, increasing their overall compensation package.

Insights into the Contractor Lifestyle

1. Flexibility and Work-Life Balance:

The best thing about IT contracting is being able to choose a job based on one’s preferences regarding location, salary, and type of project. They also have a choice when it comes to working hours, whether it be day shift or night shift. As long as they are able to meet deadlines, they have the flexibility to choose their schedule.

IT contractors are free to choose their work location. Source: hiveage.com

However, without a schedule, plus the pressure of meeting deadlines for projects, sometimes contractors have to work long hours and give up their weekends. 

2. Job Security and Stability:

While permanent employees enjoy long-term job security and stability, IT contracting faces uncertainty when a project ends—sometimes abruptly—or client needs change. This can result in a loss of work until the next assignment is found. Depending on the contract duration, this can happen several times a year.

To offset this uncertainty, many contractors expand their customer base in order to disperse and minimize dependence on a single source of income. Also, most contractors prefer long-term contracts for a year or negotiate advance agreements that may provide more predictable income flows and job security.

3. Professional Development:

IT contracting gives the contractors the unique opportunity to deepen their expertise by working on a variety of projects across multiple industries. This exposure opens experience to diversified technologies, tools, and workflows that add to their skill set and professional portfolio.

Working with a number of clients and collaborating with different professionals expands one’s network. This can lead to new and valuable partnership opportunities, potentially resulting in more significant income opportunities.

Expanding professional connections as an independent contractor. Source: adobe.com

However, in a competitive field such as that of IT, it is only through continuous enhancement of their knowledge base and skills—particularly in growth areas such as AI and data analytics—that contractors could expect to maintain and advance their market value.

Making the Decision: Contractor vs. Full-Time Employee

1. Factors to Consider:

When choosing between IT contracting and full-time employment, some key things IT professionals need to consider are:

For financial goals, individuals who place a high value on high income for a short period may prefer contracting. In contrast, those valuing long-term financial security may prefer full-time employment with benefits such as health insurance and retirement plans.

Evaluating financial goals before deciding to pursue IT contracting. Source: linkedin.com

These also include career goals. Independent contractors might also diversify projects across industries. This naturally encourages skill development and network extension. In contrast, full-time jobs tend to develop careers within one company with clearer opportunities for advancement and leadership.

Last but not least, personal circumstances. Contract work can offer flexibility in hours and location, ideal for those seeking a better work-life balance or setting boundaries that allow for quality time with family and friends. Full-time employment, however, would be suitable for anyone looking to keep fixed and predictable routines.

2. Long-Term Career Goals:

While IT contracting mostly involves short-term project work, it could also be a valued long-term career part of the contractor. First, contracting allows IT professionals to get diverse experiences across various industries and develop a well-rounded set of skills.

For example, a Cybersecurity contractor may work on data security with a financial firm while simultaneously handling patient data for a healthcare provider. These experiences not only enhance their knowledge but also expand their network and client base, opening up the possibility of better contracts in the future.

Besides that, contracting is a way into full-time positions. If a contractor works on a project for, say, three months with a technology company and does an excellent job, they may get offered a full-time position after that. This brings stability and ease of transition into a company where their skills and dependability are known.

3. Seeking Advice and Community Support:

Consistently networking and seeking advice from those experienced in both contracting and full-time roles can uncover valuable insights, such as industry trends, tips for negotiating contracts, or strategies for writing persuasive proposals.

A Reddit thread on contracting. Source: Reddit

For instance, a software developer contemplating a switch to contracting for the higher earning potential might turn to online platforms like Reddit or professional forums like Stack Overflow. Here, they can gain first-hand advice from IT professionals who have made similar decisions, learning about potential upsides and downsides they hadn’t considered.

Additionally, a mentor with industry expertise can help a contractor rapidly build a diverse portfolio, with the option to transition into a stable full-time role later. This strategy is especially beneficial for those aiming to work at a large technology company, as a well-rounded portfolio can enhance employment prospects.

Frequently Asked Questions

1. What are the main advantages of being an IT contractor?

The main advantages of becoming an IT contractor are flexible conditions of work, higher income by selecting high-demand projects, gaining experience in various industries, and handling one’s work according to discretion.

2. How can IT contractors find new clients?

Use family and friend networks; offer their services on freelancing sites; establish themselves as a contractor using social networking websites like LinkedIn; seek referrals from previous clients.

3. What should I include in my contract as an IT contractor?

The independent contractor agreement should include all terms agreed upon by both parties, such as the scope of work, payment terms, due dates, and non-compete clauses.

4. Are there tax implications I should be aware of as a contractor?

Yes. According to Circular 111/2013/TT-BTC, for service contracts with a total income of 2 million VND or more, a Personal Income Tax (PIT) of 10% is applied to the total revenue. This means the service user is required to deduct 10% PIT from the payment amount specified in the contract before paying you as the contractor.