Remote work in the post-COVID world is on the rise and with that, new models of engagement are evolving as well. This blog is focused on tax and other considerations to help you make an informed decision while choosing to engage with global companies as a contractor or as an employee.
Assume you have an offer to join a US-based startup at INR 35 Lakhs (~$50K). Let's assume this US company does not have an Indian entity and offers to engage you as a contractor with a direct agreement between you and their US-based entity. While this might be your first time exploring remote work of such nature, you talk to a few friends who have been working remotely as contractors and the first thing they highlight to you are tax savings!
Let's be honest: we all like to save taxes, while being fully compliant with the tax laws of course! Section 44ADA of the Indian Tax Code, also known as Presumptive Tax Scheme for Professionals is designed to simplify tax filings for independent professionals such as doctors and architects with gross annual revenue or earnings receipts of upto INR 50 Lakhs. This same provision is also being applied by freelancers and full-time contractors working with global companies. The details of this provision are covered nicely here but for our purposes, let's focus on what it means as it relates to your job offer:
The deductions under the employee column vary person-to-person - the above table is directional and generalized to demonstrate tax liability difference.
The savings are material and tempting - should you then eyes-closed jump on the offer?
Short answer is NO and here are some other considerations for you:
- Offer Letters: Even if the Company issues these to you, these are legally not binding since you would have a contractor agreement in place - this could be an important consideration if in the future you want to apply to full-time roles at more traditional companies who would want proof of previous full-time employment along with regular salary slips
- Holidays and Leave: as an employee, you are entitled to public holidays and PTOs of upto 3-4 weeks (varies by company) - if your contract does not provision for these, you have already wiped out the tax savings!
- Termination Clauses: as a contractor, a Company can terminate you instantly whereas most employment contracts would have a minimum term of one month notice (in some cases, upto 3 months) - not having such a provision and losing out on even one month out of a year due to abrupt termination for any reason again wipes out the savings!
- Salary Delays: Any Company would always prioritize its own employees over contractors in cash-crunch situations (very common at start-ups), so do ensure you are protected on this front in your contract
- Tax Status: While filing under 44ADA, you are now classified as an independent professional and not a salaried employee - the ramifications extend to your credit history when seeking bank loans for a house or car - a salaried employee earning INR 35 Lakhs has a much better credit profile than an independent professional earning the same amount
- Indemnities: Typical contractor agreements will ask you to indemnify (be liable to pay) the Company in case they receive claims including those for your own engagement's misclassification. Such claims are common, particularly in states like California which have stringent employment laws. Ensure to read these carefully to know what you're signing up for
- Other Benefits: Gratuity, medical insurance, and many such other benefits are typically missing in most contract arrangements - Gratuity alone for example can be upto 20% of your annual salary for continued employment (minimum 5 years per law but most companies have lower thresholds to reward retention)
So, there is a lot to consider but you can argue that since the Company does not have a legal entity in India, engaging as an independent contractor might be the only option. Not really.
At kaamwork, we have developed a remote work infrastructure for global companies to engage you as full-time employees with (a) Company name in offer letters and payslips, (b) access to full statutory and employment benefits, and (c) 100% protection of your employee rights. All this while retaining the original perks of remote work of course: freedom to work from anywhere and access to global opportunities!
If you do wish to engage as an independent contractor, we can also help you negotiate your agreements to account for the above considerations so you have complete peace of mind.
There are ways to leverage some of these tax benefits by setting up your own company if your income is more than 50 Lakhs (but less than 200 Lakhs) under Section 44AD which covers small businesses but that is a topic for a separate blog :)
Lastly, the intention of this blog is not to dissuade from engaging in remote work as a contractor, but rather to create awareness of the holistic considerations towards making an informed choice while safeguarding your interests.