It’s common in certain trades for people to be taken on as independent contractors rather than employees. Independent contractors are in theory treated as small businesses, with all the tax implications covered elsewhere in this chapter, the most significant of which are a potential obligation to register and account for GST and to account for your own income tax (rather than having it deducted for you by the employer).

Deciding whether a person is a contractor or an employee can be a minefield, both for the individual and for the business taking them on. Getting it wrong can have a big impact, with consequences both for you and for the business which has engaged your services.

What is contracting?

Contractors (or consultants as they are sometimes called) are self-employed people engaged for a specific task, at an agreed price, with a specific goal in mind, often over a set period of time. They set their own hours of work and take care of their own tax obligations. Contractors are paid a fee for completing an assignment. They don’t receive a salary or wage. Often, once an assignment is finished, the contractor will move on to a new assignment with a different business. Contractors will often perform work for more than one business at a time.

Why do businesses like contractors?

Many businesses like taking people on as contractors. It gives them the flexibility to ‘hire’ and ‘fire’ at will to cover peaks and troughs in the order book. It also generally saves on costs and red tape. Some people prefer the relative freedom of contracting, though others resent the lack of rights and job security. 

Employee or contractor?

The basic rule is that if you are engaged just for your labour, you will be considered an employee rather than a contractor from a tax point of view.

Beyond that, it gets complicated.  There’s a long-standing myth that if you have an ABN, you can be treated as a contractor. As the table below shows, there’s much more to it than that. Here are the key attributes of an employee and a contractor, compared and contrasted.

 

Employee

Contractor

Definition

An employee works in the  business and is part of the business.

A contractor is ruing their own business ad provides services to a business.

Ability to sub-contract or delegate

An employee can not sub-contract or delegate the work - they can not pay someone else to do the work.

A contractor is free to sub-contract or delegate the work - they can pay someone else to do the work.

Basis of payment

An employee is paid:

  • for the time worked

  • a price per item or activity

  • a commission

A contractor is paid for a result achieved based on the quote they provided.

Equipment, tools and other assets

 The business provides all or most of the equipment, tools and other assets required to complete the work, or the worker provides all or most of the equipment, tools and other assets required to complete the work, but the business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.

 The worker provides all or most of the equipment, tools and other assets required to complete the work. The worker does not receive an allowance or reimbursement for the cost of the equipment, tools and other assets.

Commercial risks

 An employee takes no commercial risks. The business is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work.

 A contractor takes commercial risks, and is legally responsible for their work and liable for the cost of rectifying any defect in their work.

Control over work

 The business has the right to direct the way in which the worker performs their work. 

 A contractor has freedom in the way the work is done subject to the specific terms in any contract or agreement.

Independence

An employee does not operate independently from the business. They work within and are considered part of the business.

A contractor is operating their own business independently from the hiring business. Services are performed as specified in the contract or agreement and they are free to accept or refuse additional work.

 

The tax obligations facing the two types of worker are very different. Employees have tax deducted at source from their salary and receive compulsory superannuation payments from their employer. Contractors have to pay their own tax from their gross earnings and also need to make their own superannuation contributions.

The burden of getting the decision right rests with the hiring business. If they incorrectly – based on the facts – deem you to be a contractor when you should be treated as an employee, that business should account for PAYG on your wages, pay you superannuation and give you annual leave and long service leave. Similarly, if you run a small business and hire someone as a contractor, those obligations could fall on your business.

The Fair Work Act prohibits "sham contracting arrangements", where an employer treats a worker as an independent contractor in an attempt to avoid meeting employee entitlements. It is illegal for a business owner to convert staff into contractors. Employers who try it can face prosecution for tax evasion and can be penalised for flouting superannuation laws and avoiding workers compensation laws.

 

 

 

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Book a tax return appointment

Let us lodge your tax return for you. Our tax accountants have the knowledge to walk you through the tax refund process with ease. We are committed to offering expert and personal service year-round at a location convenient to you.

Book now