Salaried Employee vsConsultant - · PDF fileT he topic “Salaried Employee Vs...

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Salaried EmployeeSalaried EmployeevsvsConsultantConsultant

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Floraison India Compliances Private Limited is a Bangalore-based business consulting

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Salaried Employee Vs Consultant

DisclaimerThis publication is a product of Floraison India Compliances Private Limited. The items contained herein are provided for

general information purposes only. Floraison strives to maintain up-to-date information from its own and other reliable

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only and should not be dealt with as advice.


Much will be required of the personentrusted with much,

and still more will be demanded of theperson entrusted with more.


– The Bible

contentsIntroduction Page 1

The Mindsets Page 2

Some Major Differences Page 3

Employees Are Bounded By Company Policies Page 3

Consultants are free from company policies Page 3

Tax Issues: Compensation Page 4

Why should you choose to work as an employee? Page 6

Why should you choose not to be an employee? Page 7

What benefits you as a consultant? Page 8

What are the major drawbacks? Page 9

The 'Good Ones' and the 'Not So Good Ones'

of Being an Employee and a Consultant Page 6


The topic “Salaried Employee Vs Consultant”

is surrounded by the clouds of controversy.

When it comes to this debatable topic, the

question that haunts one's mind is “Which is a

better option? Working as an employee or as a

consultant?” It is the opportunity that comes to a

person when he chooses to work as an employee

or a consultant in an organisation. Before learning

the advantages or drawbacks of being an

employee or a consultant, one must be clearly able

to distinguish between the two.

An employee is a person whom an

organisation hires, provided that he gets a fixed

compensation paid on a regular basis for his

services in sole favour of the organisation. On the

other hand, a consultant is a professional who

offers services to an organisation as per the

project assigned to him on a contract basis.

It is considered that hiring an employee

costs at least 25 percent more than hiring a

consultant to perform the same work. Employees

are generally hired on a permanent basis whereas

consultants are hired on a temporary or more

precisely, on a contract basis. There are several

grounds on which the role of an employee and a

consultant can be differentiated, some of which

have been highlighted in the box to the right.

introduction


Employee

The general statutory

definition of "employee" for

employment law purposes is

"an individual who has

entered into or works under

(or, where the employment

has ceased, worked under) a

contract of employment". In

other words, an employee is

a person whom an

organisation hires, provided

that he gets a fixed

compensation paid on a

regular basis for his services

in sole favour of the

organisation.

ConsultantA consultant is person

having special skill or skills

that he offers to a company

or an organization. In other

words, a consultant is a

professional who offers his

services to an organization

in lieu of attractive

remuneration. He is not

bounded by any terms of

employment or any

company policy.

It is the opportunity thatcomes to a person whenhe chooses to work as anemployee or a consultant

in an organisation.

Page 1

EmployeeIn today's competitive market, there always exists a cut-throat

competition and it's needless to say that the fittest survives.

The mindset of a present day's employee is very much different

from those of the yesteryears and of the earlier generations. Today's

employee has a lot of expectations, especially in cases of

compensation and work culture. If he gets a 'more than satisfactory'

return from his employer for his service, the former gets motivated

even more and goes on to provide exceptional services to his

employer. Therefore, an employer has to keep in mind the hopes and

aspirations of each employee.


the mindsets“Motivate them,train them, careabout them and

make winners outof them...we knowthat if we treat our

employeescorrectly, they'll

treat the customersright. And if

customers aretreated right,

they'll come back.”

J. Marriot Jr.

(American Businessman)

ConsultantConsultants are like free birds and they tend to work for more

than one organisation in order to earn that 'extra buck'. Unlike

employees, consultants know it very well that a wide array of

opportunities are lined up in their way. Some of the common

opportunities include:

a) Not bound by company policies or rules

b) Not bound by strict timeframes per day

c) Can work from home or the office of the organisation

depending on his convenience

d) Can work independently as a firm or a corporate entity

e) Gets attractive remuneration on the completion of each

assignment

f) Can leave the organisation after completing the assignment, if he

wants to

g) Can take up another assignment/s with a different company

while working for a particular organisation

h) Does not have to pay the conventional taxes that an

employee has to pay. He needs to pay the service taxes only

if his annual turnover is Rs. 1,20,000 or more.

A good consultant has the capability of finding the right set of

answers and meet the expectation of the organisation that assigns a

project to him.

Due to exposure to more than one organisation, a consultant is

well-aware of the latest trends, the best practices in several fields,

service, clients, etc.

“In everysociety somemen are bornto rule, and

some toadvise.”

Ralph Waldo Emerson

Page 2

Employees are rule bound. They are

required to follow the company rules and

regulations strictly. Any flaw found and

there will be a warning from the higher

authority. Therefore, an employee needs to

remain cautious of the fact that he is being

watched. Some of the major rules of the

organisat ion involves the terms of

employment, such as leave, i.e. SL or Sick

Leave, PL or Paid Leave, Special Leave and LOP

or Loss of Payment in case of 'No cause, no

show', attendance and performance in the

office.

An employee may be transferred across

departments, divisions or locations by the

higher authority. He is not allowed to pursue

another employment or profession while

working with a particular organisation. Based

on his performance, an employee can see

himself grow within the organisation hierarchy.

He will be ranked higher or promoted to a

higher level solely based on his year round

performance in interest of the organisation and

at the judgment of the company head.

On retirement or resignation, the

organisation is bound to comply with labour

laws and give the Provident Fund and Gratuity

amounts including other benefits that the

employee deserves.

Employees arebounded bycompany policies


Consultants arefree fromcompany policies

Unlike employees, consultants are

not required to adhere to the rules

a n d r e g u l a t i o n s o f a n

organisation, specially the typical terms

of employment. They are hired on a

contractual basis and can work from

home or office as per their convenience.

They do not get the benefits of PF,

gratuity, medical facilities, etc. A

consultant can take up assignments with

more than one organisation provided

that he meets the deadline within the

given timeframe. He can offer services as

an individual, as a firm or a corporate

entity.

some major differences

company policies

Page 3

From the taxation viewpoint, an employee gets his salary based on his level or designation

in the organisation. His compensation is structured as per the Income Tax Act and Rules.

He need not maintain books of his account and is free of any service tax. There are some

exemptions, i.e. exception on the payment of taxes and deductions each month. The

exemptions and the deductions have been highlighted as follows:

Employees



tax issues: compensation

• HRA or House Rent Allowance

• LTA or Leave Travel Allowance

• Food Coupons

• Telephone reimbursement

• Provident Fund

• Gratuity

• Professions Tax

Exemptions Deductions

Aconsultant, on the other hand, gets his remuneration either on a monthly basis or on the

completion of his assignment with the organisation. This totally depends on the duration

of his association with the organisation or as long as he renders his services. However,

profession taxes are deducted. This kind of taxation comes under the heading 'Income from

Profession' as per the Income Tax Act and Rules.

A consultant is liable to pay service taxes and needs to maintain books of account if his

annual income exceeds Rs 1,20,000 (the limits specified in the Income Tax Act in one financial

year). These books of accounts should be maintained for at least eight years and if required,

must be able to produce them before the Income Tax authorities. As per the Income Tax rules, if

his per annum income exceeds Rs 10 lakhs, then his accounts need to be checked or audited

and this tax audit should be filed along with his return of income.

Consultants

Page 4


Whatever expenses a consultant bears while operating from his home or office, is

assessed as income from profession. Therefore his net remuneration comprises of

the expense borne, provided that the expenses are solely related to his assignment

with the organisation. Some common examples of such business expenditure include:

• Salaries paid to his staff including servants, in case if he works as a firm or a corporate

entity.

• Repairs and maintenance of his personal assets, such as his PC that he uses for his

freelance work.

• Travelling and conveyance if he works from the office of the organisation.

• Paying the interest of loans taken for setting up his office or purchasing equipments

for the smooth operation of the project taken up with the organisation.

If a consultant works as a firm or corporate entity, he is required to pay 'Fringe Benefits

Tax' which an employee does not have to. A Fringe Benefits Tax or FBT is a tax that is payable by

employers to an employee. This allows employees to choose from a pool of choices, some or all

of which are tax-advantaged. Instead of hard cash, an employee can select a desired

component from the list of near about 25 components that is/are of his benefit. These

components however vary as per the designation and net take home of the employee.

Now that the differences between an employee and a consultant have been discussed, one can

look forward to learning the advantages and drawbacks or disadvantages.

A Fringe Benefits Tax or FBT is a taxthat is payable by employers to an

employee.

Page 5



The and the of Being

an Employee and a Consultant

'Good Ones' 'Not So Good Ones'

why should you choose to work as an employee?• An employee enjoys the benefits of incentives, an extra earning apart from their basic pay.

• Based on hard work and dedicated performance, an employee receives rewards and earns

recognition and is promoted to a higher rank in the organisation. This motivates him and he

puts more effort for the betterment of the organisation.

• An employee enjoys many financial advantages like discounted car purchase, employee car

leasing schemes, personal loans, etc. based on his designation and the organisation he is

working with.

• Employees are entitled to protection that mainly includes – the right not to be unfairly fired

or dismissed for health or any other issues, the right to receive payments at the end of each

month, notice periods before resignation and payments in sudden job loss or redundancy

situation.

• Apart from the regular pay checks, employees are eligible for sick pay, maternity pay,

health insurance, etc. However, these benefits vary from employer to employer.

• The PF and the gratuity amount that is deducted as taxes from his salary are returned with

interest when he resigns or retires from his service. This is in compliance with the Labour

Law and the organisation is bound to pay the amount.

• Some organisations offer pension plans to its retired employees.

Benefits

Regular pay checks

Job security

Health care, pension plans and other fringe benefits

Less record keeping

Less complicated tax filing

Page 6


why should you choose not to be an employee?• The very first thought that haunts an unhappy employee is working under someone.

• Employees might feel trapped due to the company policies because these rules prevent

them from doing what they want.

• Sometimes employees might not like the kind of work they do and hence, do not have job

satisfaction.

• Due to commitments, employees need to stick to a job they do not like to pursue and

therefore feel bored. This creates a negative impact on their performance and so they are

deprived of incentives.

• The earnings are limited and increase after a long gap of six months or one year, that too

based on the employees' performance.

Drawbacks

Loss of ownership

Feel trapped since bounded by rules

Routine and monotonous assignments

Loss of creative control

Limited earnings

Page 7


what benefits you as a consultant?• Independence is the key word – a consultant is his own boss and does not have to work

under anyone.

• He is free from any kind of company policy and can take up projects with other companies at

a time despite being associated with a particular organisation.

• He is free to choose the work environment as per his convenience.

• He is not bounded by strict time frames. He can work 14 hours one day and 1 to 2 hours the

next day depending on his mood, provided that he meets the expectation of the client or

organisation he has taken up an assignment with.

• Sometimes consultants get more respect than employees.

• Hiring a consultant helps an organisation to cut down the cost.

• He is not involved in any company politics. In case if anything goes wrong, the employees

are the first to be blamed, not the consultant/s.

• A consultant is up-to-date with the latest industry trends due to exposure to more than one

organisation and several clients.

Benefits

Independence – He is his own Boss

Free from company rules and policies

Can take up assignment with more than one company

Can choose from a wide variety of assignments

Not bounded by strict time frames

Not involved in company politics

Up-to-date with the current industry

Free to choose work environment

Page 8


what are the major drawbacks?• Though there are no strict time frames, a consultant might sometimes be overburdened to

meet completion of the assignment as required by the organisation.

• He needs to interact with several clients at a time.

• He is loaded with work if he takes up more than one assignment and therefore it becomes

tough for him to complete them.

• There is no certainty of the business climate.

• He does not enjoy any financial advantages like discounted car purchase, employee car

leasing schemes, personal loans, etc.

• He is not eligible for any kind of vacation leave, PF, gratuity, health or medical insurance and

other fringe benefits.

• He is not entitled to any kind of pension plan.

• There always exists a fear of job security. The organisation authorities have the right to take

away or cancel the assignment with him, in case the former is dissatisfied.

• There is no guarantee of regular pay checks.

Drawbacks

Too much of workload

Meet several clients at one time

Uncertainty of business climate

No financial advantages

Not eligible for vacation leaves, PF, gratuity, fringe benefits

Not entitle to pension plans

No job security

Irregular pay checks

Page 9

One may ponder over seriously the nature of relationship

with the organisation before deciding upon the nature of

payment. The actual tax liability depends upon the salary

structure in the case of employment and nature of

association and expenses that can be reasonably

attributed to professional activities, in the case of

appointment as a consultant.

conclusion

Salaried Employee Vs Consultant Page 10

"The first duty of a human being is toassume the right functional relationshipto society -- more briefly, to find your

real job, and do it."

– Charlotte Perkins Gilman

O O Pur ther ublications:

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Floraison India Compliances Pvt. Ltd.,

www.floraison.in

#185/7, 2nd Floor, "Chandra Plaza",

25th Cross, 8th F Main Road,

Jayanagar 3rd Block

Bangalore - 560 011,

India

Tel: + 91-80-26538257 / 58 / 59

Fax: + 91-80-26538273

E-mail: [email protected]

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