The Ultimate Guide to Umbrella Companies

Contractors

Independent contractors working at home or abroad will often use an umbrella company to manage their contracts with clients.  As their name implies, umbrella companies can shelter you from unforeseen payment and compliance problems, and will act as a go-between to connect all parties to the contract.

We have put together this guide for you that explains all that you need to know about umbrella companies.

What is an Umbrella Company?

When you set up a contract with your client, there are a few ways to organize payment and one of the easiest is to use an umbrella company.  One way to think about it is that the umbrella company acts as your ‘employer’ for the purpose of fulfilling your contract (in some countries they may actually employ you if you cant qualify as self-employed.)

This means that they will get your payment from the client and/or agency and in turn pay to you, after deducting owed taxes and other social contributions.  As a result, you don’t have to monitor the process at all once you have submitted request for payment.

So, the umbrella company is a third party intermediary working between you, your recruitment agency and the end-client to make sure that payments are made, and the client is satisfied.  It removes the uncertainty of contracting, especially across international borders.

How Does an Umbrella Company Work?

The process of using an umbrella company is fairly straightforward.  Assuming that you use an agency to find your clients for you here is how it works:

  • Umbrella company contracts with your agency
  • You as the contractor, also contract with the umbrella company
  • You submit your timesheet/project deliverables to your agency, and copy the umbrella company
  • Umbrella company invoices the agency
  • Agency invoices the client, and client pays agency
  • Client pays the agency and umbrella company is paid by agency
  • Umbrella company make necessary deductions and issues a receipt/payslip
  • The payment is sent to your designated account

Because there are often three parties involved in your contract (you, agency, client) using an umbrella company to facilitate payment and contract fulfillment gives everyone peace of mind.

Should You Use an Umbrella Company?

As a contractor, you may wonder why you should use an umbrella company.  If you are used to setting up your own client contracts, have a reliable payment system and are well versed in tax and contribution requirements, you may think it is unnecessary.

However, there are some real advantages in using an umbrella company as the intermediary for all of your client projects and contracts, as they can act as third party to the transaction to ensure that everything goes smoothly.  This saves the contractor the time and effort of managing their own payments and compliance, and offers a ready resource in case any issue arises.

An umbrella company does charge a fee for their services (a fixed percentage of your contract) but that should not be a deterrent for using this valuable contracting service when you consider the time and cost saving in the event of potential non-payment of compliance problems.

Here are some of the benefits of using an umbrella company:

  • Removes uncertainty from the payment process, especially with new clients or in foreign countries
  • Increases client confidence in getting the service they pay for
  • Ensures compliance with all tax and self-employment contribution requirements
  • Automated submission of invoices and quick receipt of payments
  • Can sponsor work permits or business visas for overseas contracts
  • Will hold licenses needed in some countries for employing contractors

You should be careful when choosing an umbrella company since there are varying levels of experience and services offered.  You can take a look at our key five questions to ask when selecting the umbrella company best for you. 

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