In the international contracting world, income illustrations are often requested early in the recruitment process. These projections help contractors determine whether a role is financially viable, saving time for both the contractor and the hiring company.
But how can contractors be sure the figures provided are accurate? In this article, we’ll explore the key factors to consider when evaluating income illustrations, ensuring you can spot realistic projections and avoid any unpleasant surprises.
What is an income illustration?
An income illustration is a tool used to show contractors how much of their daily or hourly rate will end up as net pay in their bank account. This can take the form of a table, PDF, Word document, or even a few sentences in an email. These illustrations help contractors understand the local tax system, identify their liabilities, and ultimately decide if the net amount meets their financial needs.
Agencies and clients use these illustrations to assist contractors in making informed decisions about assignments. Typically provided by umbrella companies, these projections are not always accurate. Some are overly optimistic, while others are misleading or completely incorrect.
Common pitfalls in income illustrations
Experienced contractors can often spot inflated illustrations, but those new to contracting or working in a new country might not recognise errors. These mistakes can lead to significant issues down the road. Here are some common tactics used to inflate income illustrations:
- Adding unattainable expenses to the calculation to reduce taxable income, thereby increasing the net take-home pay.
- Underestimating social security contributions by calculating them at a minimum level or even zero, without properly assessing the contractor’s status.
- Applying incorrect tax brackets, such as combining tax brackets for married couples or using tax breaks for non-nationals, which can artificially lower the income tax rate.
- Excluding additional contributions like municipal tax, healthcare costs, and other mandatory deductions, which can make the net pay appear more attractive.
Unless you’re an expert in local taxes it can be difficult to spot if any of these things have happened. This means you could get a shock when you get paid or have to submit a tax return.
How to spot red flags in income illustrations
To avoid being misled by inflated figures, contractors and clients should be vigilant when reviewing income illustrations. Here are some key points to check:
- Realistic retention rates: For employed solutions, the net retention typically hovers around 50%. For self-employed contractors, 65% to 70% is achievable. A net retention of 90% is a clear red flag—if it seems too good to be true, it probably is.
- Social security contributions: These should always be included in the figures. Whether listed as a single figure or broken down into employer and employee contributions, it should never be zero unless specifically requested or explained.
- Income Tax rates: In Europe, income tax rates can range from 5% in Italy to 50% in Sweden. As a general rule, expect to see income tax rates between 30% and 45%. This average range helps to mitigate most of the tricks used to inflate take-home pay.
