As a business owner, your taxation, superannuation and employment obligations differ depending on whether your worker is an employee or a contractor.
Penalties can apply if you get it wrong.
Simply calling someone a contractor will not relieve a business from obligations to pay superannuation and taxation where that worker is otherwise being treated as an employee.
The Australian Taxation Office publishes helpful information for businesses who are unsure whether their works are employees or contractors. A summary of that information is set out below.
A multi factor test is used to determine whether a worker is an employee or a contractor. There is no single rule that determines the question however some factors carry more weight than others.
Employee
Ability to subcontract/delegate: the worker can’t subcontract/delegate the work – they can’t pay someone else to do the work.
Basis of payment: the worker is paid either:
• for the time worked
• a price per item or activity
• a commission.
Equipment, tools and other assets:
• your 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 your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.
Commercial risks: the worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work.
Commercial risks: the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
Independence: the worker is not operating independently of your business. They work within and are considered part of your business.
Contractor
Ability to subcontract/delegate: the worker can subcontract/delegate the work – they can pay someone else to do the work.
Basis of payment: the worker is paid for a result achieved based on the quote they provided. A quote can be calculated using hourly rates or price per item to work out the total cost of the work.
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 this equipment, tools and other assets.
Commercial risks: the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
Control over the work: the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement.
Independence: the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.
Other relevant factors include:
- whether the worker works standard hours and receives holidays or sick leave;
- whether the work is ongoing or lasts for the term of each particular task or contract;
- whether there is an agreement in writing stating the nature of the relationship;
- whether the worker renders tax invoices and files GST returns.
There are some helpful online tests which could assist in determining whether your workers are employees or contractors. They are:
- Australian Government Employee or Independent Contractor Decision Tool
https://www.business.gov.au/people/contractors/employee-or-contractor/independent-contractors-decision-tool ; - Australian Tax Office (ATO) Employee or Independent Contractor Test
https://www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/; and - ATO Superannuation test
https://www.ato.gov.au/Calculators-and-tools/Super-guarantee-eligibility/.
Your tax, super and other obligations will vary depending on whether your worker is an employee or contractor.
If your worker is an employee you’ll need to:
- withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts to us
- pay super, at least quarterly, for eligible employees
- report and pay fringe benefits tax (FBT) if you provide your employee with fringe benefits.
If your worker is a contractor: - they generally look after their own tax obligations, so you don’t have to withhold from payments to them unless they don’t quote their ABN to you, or you have a voluntary agreement with them to withhold tax from their payments
- you may still have to pay super for individual contractors if the contract is principally for their labour
- you don’t have FBT obligations.
If you have are unsure whether your worker is an employee or a contractor, it is important that you seek and accounting advice. The Small Business Lawyer can assist with determining whether your workers are employees or contractors, and can prepare Independent Contractor Agreements if required.
