As part of Outwitly Staffing, we often speak with design and research professionals currently working as full-time employees (FTEs) who are considering becoming independent contractors or freelancers. But it can sometimes feel scary for them to make the jump, because they may not fully understand what it means to work as a contractor. That’s where we come in!
This blog post will demystify a lot of concerns that UX designers, UX researchers, and service designers have about becoming freelancers. Please note: this information best applies to fellow Canadians, although some tips and advice will be widely applicable! We’ll touch on:
- The key differences between FTEs and freelancers/contractors
- Payment and compensation structures
- Benefits, time off, and equipment
- Admin, taxes and accounting
- How to know if you’re ready to make the leap
Caveat: We are not accountants. We can provide you with our best advice and help you make sense of the world of contracting in UX and human-centered design, but we strongly encourage you to speak with an accounting professional.
Terminology: Making Sense of Full-time Employment, Contracting, and Freelancing
First, let’s start with the basics. What are we talking about when we use the terms “full-time employee” (FTE), “contractor,” and “freelancer?” There are a lot of different terms used to describe these types of roles, but ultimately, they are very similar.
Let’s break them down:
- Full-time employee (FTE): someone who is employed by a company or organization, and is paid to do work for them on a permanent, full-time basis.
- Contractor: someone who works on a contract basis, often subcontracting under another firm to work for a client. Typically, you’d refer to someone as a “contractor” when they are working on longer-term contracts for over six months at 40 hours per week. Usually, contractors don’t have direct clients, and they often work with intermediaries, like recruiting firms and other consulting firms.
- Independent consultant: someone who works as a consultant on a project-by-project basis, and typically isn’t dedicated to one client. Independent consultants still subcontract with other consulting firms or agencies.
- Freelancer: someone who also works on a shorter-term, project-by-project basis, with no expectation of full-time hours, and typically isn’t dedicated to only one client.
The terms “contractor,” “independent consultant,” and “freelancer” can all be used interchangeably! All three of these roles are classified as incorporated or sole proprietors. Legally, there is no inherent difference between them. To keep things streamlined and straightforward, we’ll use the term “contractor” throughout this blog to describe all three roles.
Key Differences Between Full-time Employment and Contracting in UX & HCD
As mentioned, making the leap from a FTE to a contractor can be daunting and intimidating! From the outside looking in, it’s hard to know what the major differences will be, or how to prepare for them. Generally speaking, these are the key differences between life as an FTE and as a contractor:
- As a contractor, you must be a sole proprietor or incorporated.
- Both roles are paid differently (e.g. bi-weekly vs. monthly invoicing).
- Vacation, sick leave, and benefits are handled differently.
- There are different administrative and bookkeeping requirements.
- Tax deductions and tax planning abilities also differ.
We’ll dive into each of the above in more detail below. Keep scrolling!
If you want even more juicy details on becoming a contractor, watch our FREE webinar: Make the Leap from FTE to Contractor in UX and HCD!
Compensation and Payment Schedules as a Contractor
Full-time UX (user experience) and HCD employees are often paid an annual salary plus a package of benefits, whereas contractors can be paid on a time and materials basis at an hourly rate (this is the most common option!), or on a fixed fee basis (using value-based pricing). Generally speaking, contract rates are higher than FTE salaries, to account for the additional administrative requirements, bookkeeping and overhead costs associated with running your own business! For short-term, part-time, and project-by-project contracts, rates can be even higher, to account for opportunity loss. If you want to learn more about how hourly rates can differ depending on the type of contract, check out our webinar.
In addition, the timing and scheduling of payments will differ between FTEs and contractors. The majority of employees in UX and HCD will be paid on a bi-weekly basis by their employers. Their paycheques will have certain deductions, including Employment Insurance (EI) and Canadian Pension Plan (CPP), as well as taxes and other deductions related to benefits. When you become a contractor, payment terms can vary from contract to contract. We go into a ton more detail on this topic in our FREE webinar! Sign up here.
Here are two of our best pieces of advice you’ll want to steal when it comes to compensation and payment as a contractor:
- Remember to save some of that money for tax filing time at the end of the year! Because income tax isn’t automatically deducted from your payments, you have to factor this in yourself. If you forget to do this, come tax season, you’ll be in for a not-so-lovely surprise.
- Have a financial plan in place when you first start contracting, as you may not receive payment for several months after you begin working. As mentioned above, payment terms may vary. Go through your contract with a fine-tooth comb, don’t be afraid to ask clarifying questions, and make sure you budget accordingly.
Benefits, Taking Time Off, and Buying Equipment
Let’s look at health/medical benefits, taking time off for vacation, and purchasing equipment and software. As a human being, you must reserve space for work/life balance — everyone deserves time off, and becoming a contractor is no exception to this!
Here are five frequently asked questions:
- Will I get medical benefits as a contractor? Unlike full-time employees, contractors are responsible for acquiring their own health benefits. Don’t worry — getting medical benefits for yourself and your family is easily doable, and the price point can be very approachable! In some cases, you may even want to consider a Health Care Spending account (HSA). Each province’s health care plans will differ in coverage and cost, so we’d recommend starting your search through companies like Manulife, GMS, Blue Cross, and SunLife.
- Do I get to take a vacation as a contractor? What happens if I’m sick? When you’re a contractor, there is no paid time off for vacation or sick leave. You’re only paid for hours worked! If you want, you can voluntarily pay into EI benefits, and put them to use if you have to stop working due to your health. But neither EI nor sick/vacation pay are deducted from your invoices as they would be on a full-time paycheque. Taking care of yourself is of the highest importance, so you should still take vacation and sick days when you need them. Just keep in mind that you won’t be paid for them. Many contracts will account for vacation, and the total number of hours allotted on your contract may work out to having 2–4 weeks of unpaid time off.
- Do I have to ask permission for time off? No, you don’t need to ask for permission! However, you should always use your best judgement when planning vacation time. Align your time off with your projects’ schedules, and always alert clients, team members, and key stakeholders of your time away. Communication is crucial, as always!
- Can I work from abroad? One of the greatest perks of contract work is working when, where, and how you want. As long as it’s within the terms of your contract, you have autonomy over your schedule! Some contracts may dictate in-person work, or work within Canada (or your country of residence) for security reasons. In other cases, your work has no boundaries! Be mindful of time zones if you’re working abroad, because you’ll likely still be expected to align your working hours with your teammates. Keep in mind that any health benefits you pay into likely won’t apply when you leave your country of residence, and you may need to buy travel health insurance. If you’re going to be working outside of the country long-term, you should also look into related tax-paying considerations.
- Will I have to cover costs for equipment, and subscriptions to design and research software like Figma, Miro, Adobe, Calendly, Dovetail, Typeform, etc.? Again, this can vary with different contracts, depending on factors like company type, security requirements, duration of contract, etc. However, most of the time, the onus is on the contractor to pay for their software subscriptions. The good news is, these are tax-deductible expenses! We’ll get into that more in the next section.
If you want to learn more about equipment or travel costs as an independent contactor, be sure to listen to our free webinar!
Admin, Accounting, and Taxes
The staffing team at Outwitly meets with hundreds of service design and UX practitioners yearly! The elements of contracting that folks tend to be most nervous about are admin tasks, accounting and taxes. We get it, this stuff can be stressful, but we have your back, and we’re here to make things a lot simpler!
First, let’s jump into sole proprietorship vs. incorporation.
Sole proprietorship means that an unincorporated business is owned by an individual — the simplest business structure! If you’re a sole proprietor, you file and pay personal income tax on the net income generated by, you guessed it, you.
Incorporating your business means that it becomes an entirely separate entity from yourself. An accountant is required to file your income tax at year-end, then the business pays corporate taxes on what it earns, and you pay personal tax on what you withdraw from the company (or what the company pays you). With incorporation, you’ll need a separate bank account from your personal one. So, when should you incorporate your business? Generally, you’ll start seeing significant tax savings from incorporation when your business reaches $50,000 to $60,000 in gross annual revenue before expenses. If you’re projecting your business to earn over $50,000 in twelve months, you’re better off incorporating right away! Again, make sure to speak to an accountant before making any decisions!
Let’s face it: tax talk isn’t glamorous or fun! Instead, it can be quite confusing and overwhelming, especially if you’re new to working as a contractor and you’re used to the full-time employee life. There are a ton of tax planning strategies out there that are unique to being a contractor, including ways to take advantage of tax breaks and maximize your tax deductions. If you want to hear more on that, we’ve recorded a FREE webinar you have to get your hands on.
Want an in-depth breakdown of tax planning, strategies, and money-saving opportunities for contractors? Our free webinar has you covered!
Community and Career Development for Design Contractors
A common concern we hear from designers switching to contracting is the fear of losing their sense of community. Something full-time employment is good for is constant interaction with coworkers! Conversely, in contract work, it’s up to you to initiate your involvement with design communities, and to fund your personal development (hello, tax deduction!). Luckily, there’s no shortage of ways to build and maintain a network of professional relationships.
Here at Outwitly, building community is always top of mind! Folks who work with Outwitly as contractors (a.k.a. “Outwitlians”) have access to…
- An incredible community of designers, including our online Slack group.
- Design coaching: Join group coaching calls led by an executive-level service design consultant, available to help you navigate any challenges you might be facing.
- Design resources: An entire library of design tools, methods and templates at your fingertips.
We’re always looking for independent contractors in UX design & UX Research, UI/visual design, design research, design strategy, service design, and project management to assist us with private and public sector client work.
Ready to make your dream of being your own boss a reality?
Join our independent contractor pool today!
When to Make the Leap from FTE to Contractor
If you’ve made it to this point in the blog, past the daunting questions about compensation, timesheets, taxes, and bookkeeping, congratulations — you’re crushing it! If you’ve decided that contract work interests you, the time has come to determine when you should make the leap! In meetings with potential contractors, we’re often asked questions like, “How do I know if it’s the right time to make the leap?” or, “How can I be sure that contract work is right for me?” Hopefully, the following advice will help bring you closer to your answer.
We suggest making the leap once you’ve had a few (3–5) years of experience in the industry. There’s a ton of benefit in gaining in-house work experience straight out of school! It’s good to see how companies operate from the inside before branching out on your own. You should never underestimate the value of building professional relationships during your first years in the workforce. Plus, UX and service designers are expected to possess certain critical soft skills that can only be learned through working with others.
Since they often charge higher rates, contractors are also expected to be more senior in their careers, and to come off as mature. A key piece of maturity for designers is possessing impeccable communication skills! Sometimes you need to learn this as an employee first, acting like a sponge as you absorb everything you possibly can from managers and colleagues who are more experienced. Before you’re ready to jump into contracting, it’s important that you become a self-starter who is highly organized, with good risk tolerance. As we mentioned above in the section on payment schedules, we suggest you have a solid nest egg to fall back on that can cover you for a few months between contracts, or while you wait for payments to come in.
We hope today’s post helped you learn more about the exciting and abundant world of contracting in UX and human-centered design. Ultimately, having a small freelance business (even as a side hustle) can offer unique tax planning advantages that all individuals should consider! And remember, ALWAYS seek professional financial advice from an accountant. (We are not accounting professionals.)