Software Dev career advice: Salary vs Contracting

[howDoesTheMoniesWork]

I currently work as an Intermediate software developer at one of the big 4 banks. 2023 will be my 7th year of working.

Currently make 53k gross. Deductions are med aid, mandatory pension fund contribution (13.5%), UIF and PAYE. Net comes to R35K a month. I get 28 days of leave per annum, an annual bonus (last one was slightly more than a months gross), and a performance-based increase once a year.

Received an offer from Company A for an Intermediate Dev position. They're a well-known dev house that contracts out to various big corporates. Offer is R65K gross. Deductions will be med aid, mandatory contribution to retirement fund (min 5%), and PAYE. I'm estimating a take-home of around R43k. 22 days of leave. Annual bonus (sometimes two). Two performance-based increases a year. Company A is very much a safe, reliable, familiar remuneration structure.

Received another offer from Company B. This is where it starts to get interesting. Company B is presented as much more of a consultancy. The client I was selected for is one of the other big 4 banks.

I had a chat with the CEO yesterday. Seemed like a really nice, smart guy. A lot of what he said about the company focusing on finance/investing for their employees intrigued me. I try and live by a lot of the stuff he mentioned. He spoke a lot about helping employees focus on their financial freedom, and horizontal growth of your wealth instead of just focusing on a higher salary.

He explained that there is an option for me to be put on company B's payroll as a normal employee, but they prefer the option where you invoice your time to the company and the company pays you. He explained that they try to set up everything to be as tax efficient as possible for the employee. "Your net salary is always what's most important" - what he said. They even help employees set up companies for themselves so they can charge out their time.

He gave me the offer as follows. R400/hour ie R800k/annum (R66.6k a month). What he impressed upon me is that I need to look at the net amount they are offering... It would be R800k gross/annum but R709k net. ie, 12% tax rate. That would come to R59k net/month. I have no idea how they pull this off... or if it's even possible in the first place, but that's what he shared with me.

They also have a killer referral program (R100k/year for each person you refer who stays with the company). They also have multiple employee investment schemes. They also do profit share of the company ie, when you join you are a "partner" of the company.

In the course of the past week Company B also mentioned that another dev position opened up in an existing team they already have placed at the same client (big 4 bank). A senior dev emigrated, so now they have a gap that they really need to fill. On the call with the CEO, he mentioned he would like to offer me the second position as well. It's a senior dev role with a rate of R500/hour ie 1M/annum. I have a call scheduled with the TL for that team this week.

Company B's first offer is pretty good as well, esp if the reduced tax thing is to be believed. Company B's second offer is just crazy. It's a level I didn't think I'd be able to get to for at least a year or two.

My concern comes in with this whole consulting/charge-by-the-hour thing and the implications of invoicing your time. For example: Looking at the contract, there's no mention of leave days... I'm guessing consultants don't get leave days because you're charging by the hour? So then if you start comparing apples with apples and presume that I would take some leave days (ie, I would be choosing to forgo chargeable hours), then the gross and net amounts start to look a bit lower. There's also no mention of an annual bonus.

So yeah, some doubt for me regarding Company B and their structure. The offers (esp the second one) seem too good to be true. But a lot of doubt comes from the fact that my employment history so far has been straightforward "monthly salary" positions and maybe I just don't understand this consulting stuff. Maybe this is how freelancer/entrepreneur devs make their money? I mean, you always hear the "you'll only earn big bucks when you're working for yourself". Maybe company B just enables you to do that kind of thing?

So my question to you guys... any advice? Have you guys worked in this kind of remuneration structure previously? Is it a "trap" or legit or is company B just nicely dressing up their offer? Does it even sound realistic?

Also, even if it's slightly risky (no leave days/bonus/gotta invoice out time) would I be completely stupid to turn down the 1M/annum offer? I feel like I would be. It's like, yes there's a fear of the unknown, but I'm early on in my career, pretty financially secure, and having that kind of money against my name is hard to ignore.

 

[Tomtomtom]

Sounds like you'll regret it if you don't give it a shot but your gut is onto something too.

Obviously company B is selling you something that works for them: flexibility and freedom from much of SA labour law.

The flip side is you're on your own.

If you invoice for your time you should be highly suspicious of any promises. The difference between gross and net is no longer anyone else's business but yours. You do your own accounting, taxes, retirement saving, business expensing, etc.

Don't worry about leave days. It's not being able to bill enough hours that's the risk. You don't want to be on unintentional unpaid leave. What guarantee do you have that all your time will be bought?

In general you need more than one client if you want to go this route, so if you take this offer, do not relax, start working on the next one asap, and obviously be careful what you sign e.g. non-compete clauses.

 

[The Voice]

Not sure how contracting works in SA, but in the UK it’s inside or outside IR35. The former, you basically come in as an employee of the company, they pay your tax to HMRC, etc. Pay isn’t all that great. The latter, you’re basically an employee of your own company working on an FTC, and the salary is WAY higher, but there is no sick pay, no annual leave, and you have to submit your own returns to HMRC.

For both, though, unless the company you’re working for extends your contract, you’re going to have to be looking for a new job every 6 months or so.

So, the question is: long term security, or short term gains?

 

[B-1]

Typically contracting work is paid 25-30% more because the contractor is taking on more risk.
If wherever you are placed is downsizing contractors are usually first to go. Your contract is also easier to not renew vs retrenching a permanent employee.
Permanent employees also often have other perks like lower interest rates, provident funds, study leave and budget etc.

Personally I never minded contract work but you need to make sure you get the compensation to match the extra risk and loss of benefits.

 

[Web-Guy]

so contracting is not as secure.
so you need to take a month of for leave and a month off for sick leave.

therefore, when contracting, you need to earn in 10 months - working 7.5 hours a day, what you make as the cost to company for the permanent job in 12 months (including possible bonus + raise)
that's just to earn the same....

please note the 7.5 hours. don't make it more its realistic.

 

[howDoesTheMoniesWork]

Don't worry about leave days. It's not being able to bill enough hours that's the risk. You don't want to be on unintentional unpaid leave. What guarantee do you have that all your time will be bought?

Yep. 100% valid concern. Looking at the contract I found something along these lines:

it may be that the services of the Contractor are not required at all times and at consistent periods. To this end, the Company shall utilise the services of the Contractor solely in accordance with its needs and exigencies and in accordance with the requirements of its operational dictates.

So from what they've told me, Company B provides a very large amount of Dev resources to one of the big 4 banks. I don't see it being too much of an issue (at least, I hope it won't ever be an issue)

In general you need more than one client if you want to go this route, so if you take this offer, do not relax, start working on the next one asap, and obviously be careful what you sign e.g. non-compete clauses.

The CEO did mention if there are other projects at the client or the company that you feel you can do, you are welcome to "sign up" to do them. Even to the extent where, if you find you finish work quicker than you thought, you can join other projects and bill hours.

There were two mentions in the contract regarding non-compete stuff (paraphrasing here):

1. You are free to pursue other opportunities as long as they do not conflict with your ability to render services to the company
2. 12-month restraint of trade: "shall not set up business or form part of any business in any capacity whatsoever in competition with the Company within the Client or at the Organisation's Clients."

 

[howDoesTheMoniesWork]

Not sure how contracting works in SA, but in the UK it’s inside or outside IR35. The former, you basically come in as an employee of the company, they pay your tax to HMRC, etc. Pay isn’t all that great. The latter, you’re basically an employee of your own company working on an FTC, and the salary is WAY higher, but there is no sick pay, no annual leave, and you have to submit your own returns to HMRC.

For both, though, unless the company you’re working for extends your contract, you’re going to have to be looking for a new job every 6 months or so.

So, the question is: long term security, or short term gains?

So in this case it is the latter. Coming in as a full contractor ie "no relationship with the company". But also, the contract is valid for 5 years.

The CEO explained the reason for having a contract like this is to benefit the employee and how an employee is able to bill and charge and optimise tax.

So in this case, there is some medium to long-term security I guess.

 

[howDoesTheMoniesWork]

Typically contracting work is paid 25-30% more because the contractor is taking on more risk.
If wherever you are placed is downsizing contractors are usually first to go. Your contract is also easier to not renew vs retrenching a permanent employee.
Permanent employees also often have other perks like lower interest rates, provident funds, study leave and budget etc.

Personally I never minded contract work but you need to make sure you get the compensation to match the extra risk and loss of benefits.

If I do indeed get that second offer, it will be around 30% more than I could be making at Company A.

 

[B-1]

The CEO did mention if there are other projects at the client or the company that you feel you can do, you are welcome to "sign up" to do them. Even to the extent where, if you find you finish work quicker than you thought, you can join other projects and bill hours.

This is a restriction from SARS they have been cracking down on this practice for a while. Best is to find an accountant thats comfortable with what you are trying to do or fully understand what you are getting into before you sign things.

 

[howDoesTheMoniesWork]

If you go the consulting route, make sure you understand: 1) how many hours / days you are expected t work a year 2) how many days you will be able to bill a year 3) sick leave - you won't likely get this (you will just not be paid for no work done).

Yep, these were exactly the kinds of concerns that immediately came to mind.

The contract states I'm expected to work at least 40 hours a week. When speaking to the CEO, he worked out everything at 2000 hours per year (ie, full 8 hour days, 5 days a week)

There is a concern where the contract states something along the lines of "there may be a situation where the company does not require your services at all times or for consistent periods. To this end the company will only use of you what is required" (I am heavily paraphrasing here)

Also bear in mind you will be a sole proprietor as far as SARS is concerned. You will need to move over to provisional tax which involves 3x tax returns a year and 2x payments. They may also be required to tax you 25% and you would claim back from SARS if your liability is less than that. You can claim office expenses if you work from home. You can also claim other expenses required for running the consultancy but you will need to keep records of everything and submit balance sheet / income statement to SARS as any ordinary business. Find an accountant to make it easier - usually around R10k per annum max.

Thanks. This is valuable info. I knew about the claiming stuff back. If I go the consulting route, I will have to research more.

 

[Harmonic]

Haven't read other replies but you're underpaid af. With 7 years experience you should be making a ton more. To give you an idea. I was making just over 10% more than that in 2016 with 3 years experience as a full time employee.

If you're concerned about the security, why not consider applying to somewhere like Entelect? Same corporate drudgery but most likely better pay.

If you do go the contracting route, don't bill by the hour. Bill by the day/week/month. Nothing realistic can be done, so far as software is concerned, in 1 hour increments, especially if you appreciate your sanity. Also, so far as rates go, marketing yourself is key but this applies to being a regular employee anyway.

 

[howDoesTheMoniesWork]

so contracting is not as secure.
so you need to take a month of for leave and a month off for sick leave.

therefore, when contracting, you need to earn in 10 months - working 7.5 hours a day, what you make as the cost to company for the permanent job in 12 months (including possible bonus + raise)
that's just to earn the same....

please note the 7.5 hours. don't make it more its realistic.

Thanks for that. I was comparing apples to apples with the leave days. ie, company A offered 22 days, I looked at the offers from Company B assuming I would be taking similar leave days. It really gives a clearer perspective.

I worked out everything on 8 hours a day, as that is what was mentioned by the CEO and what is in the contract.

 

[konfab]

Honestly, it depends on you stage of life.
With me, a wife, a mortgage and 2 konfablings, I would take company A.

Also, you can only start getting tax benefits when you have more than one client as a personal company

 

[howDoesTheMoniesWork]

Also bear in mind that if you bill the company more than 1 mil a year you will be liable to register for VAT which means VAT returns every two months and you will add VAT to your invoices.

Didn't even know this was a factor.

So what does that mean? I will charge out VAT and then pay VAT to SARS? Net effect is zero? Or is the amount you charge and the amount you pay to SARS different?

 

[howDoesTheMoniesWork]

Haven't read other replies but you're underpaid af. With 7 years experience you should be making a ton more. To give you an idea. I was making just over 10% more than that in 2016 with 3 years experience as a full time employee.

If you're concerned about the security, why not consider applying to somewhere like Entelect? Same corporate drudgery but most likely better pay.

If you do go the contracting route, don't bill by the hour. Bill by the day/week/month. Nothing realistic can be done, so far as software is concerned, in 1 hour increments, especially if you appreciate your sanity. Also, so far as rates go, marketing yourself is key but this applies to being a regular employee anyway.

There are reasons behind the level of pay. Changed tech stack a year or two ago, and thus don't have the same amount of "consistent" experience in the current area.

Also, tbh, the level of pay is not so far off from the norm. For example, the offer from Company A is R780k/annum... that looks about right if compared with Entelect's salary ranges.

 

[zerocool2009]

My honest advice before comparing contracting vs permanent: work smarter, not harder

 

[howDoesTheMoniesWork]

Honestly, it depends on you stage of life.
With me, a wife, a mortgage and 2 konfablings, I would take company A.

No wife. No kids. No bond (renting by choice/for flexibility).

Also, you can only start getting tax benefits when you have more than one client as a personal company

Just looking at it surface level:

R800k salary: PAYE = R216160 (at max, 39% tax bracket)
R800k invoiced: small business tax = R128013 (28% of lump sum exceeding R550 000 + R58 013)

So quite a big reduction on tax right there.

 

[howDoesTheMoniesWork]

My honest advice before comparing contracting vs permanent: work smarter, not harder

That is what I'm trying to do. Also similar to what the CEO mentioned. They try to give their employees opportunities to reduce tax costs, grow their own companies, and invest in the right kinds of places.

 

[konfab]

No wife. No kids. No bond (renting by choice/for flexibility).


Just looking at it surface level:

R800k salary: PAYE = R216160 (at max, 39% tax bracket)
R800k invoiced: small business tax = R128013 (28% of lump sum exceeding R550 000 + R58 013)

So quite a big reduction on tax right there.

You can't touch the money in the business. If you withdraw it, it is a salary and you pay tax on it.

Besides what you really want to do is to have a partner or spouse that you can pay a salary to. Then instead of paying the tax on R800k, you pay each R400k which drops you down a few tax brakxets.

And that is less a portion your electricity, water and internet. Which you can put through the business.

But as I said, you need more than one client that you are doing work for, elsewise you are taxed like everyone else.

 

[Tomtomtom]

Be careful with the SBC tax stuff. There's no free lunch. If you are seen as providing a personal/professional service you are disqualified. You need your own employees, or you need to be selling something other than your time. Otherwise, you pay 40%+ like the rest of us.