Employees vs. contractors – what’s the difference?
17 February 2020
When it comes to employees vs. contractors it’s vital to understand the difference. If you don’t, you run the risk of potentially not meeting your tax obligations. In some cases, working out whether a worker should be treated as a contractor or employee may not be clear.
If you incorrectly treat a worker as a contractor when they are supposed to be an employee, you will face penalties for not meeting your PAYG and superannuation tax obligations.
A common misconception is that just because a worker has an ABN or a registered business name it automatically means they are a contractor.
Similarly, just because a worker requests to be employed as contractor doesn’t necessarily mean the business should engage them as one.
Each situation depends entirely on the circumstances to which you engage the worker, not their preference.
Employees vs. Contractors: the main differences
The worker is a contractor if:
- They are free to subcontract or delegate work
- They are paid for a result based on the a quote they provided
- They provide all or most of the equipment needed to do the job. The worker does not receive allowances or reimbursements.
- They are legally responsible for their work and cost of rectifying
- They can dictate the way in which the work is completed (subject to the agreement)
- They are operating their own business independently and can freely accept or decline additional work.
A worker is an employee if:
- They do not have the freedom to subcontract
- They are paid: for time worked, price per item or activity, or a commission
- They receive reimbursements or allowances, and are provided with all or most of the equipment needed to conduct their work.
- Responsibility for their work is covered legally by your business
- Your business can set the terms of work and the way in which the work is carried out
- The worker is not conducting an independent business and are considered part of your business.
- An employee must be an individual
- Companies, trusts and partnerships are always contractors
- Hiring a company, trust or partnership becomes a contracting relationship for tax and superannuation purposes
If you hire any of these types of workers, they will always be classed as an employee:
- Trades Assistants
Utilising a Labour Hire Firm
If you pay a labour hire firm, recruitment service or group training organization to source workers, the contract is with the firm and they are responsible for paying the employee and associated obligations. Your business is referred to as the host employer.
Your tax and super obligations:
When hiring employees:
- PAYG witholding
- Superannuation guarantee contributions
- Fringe benefits tax (if applicable)
When hiring contractors:
- No PAYG 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 superannuation for individual contractors if the contract is principally for their labour
- you don’t have FBT obligations
Consequences of not understanding the applicable worker type:
No PAYG withheld when it should be:
Appropriate PAYG will need to be paid and penalty interest will apply
No Workcover paid when it should be:
Premiums will be revised, 100% penalty and interest.
No superannuation Guarantee Contribution paid when it should be:
You won’t be able to claim a tax deduction for the contribution, interest and penalty of up to 200%
No payroll tax paid when it should be:
Interest and premium interest charge, possible penalties up to 90%
The ATO Employee/Contractor Decision Tool
Use the ATO Employee/Contractor Decision Tool on the ATO website to find out if a worker should be classed as an employee or a contractor.
You can use this tool to assess how the worker should be treated, you will be prompted to answer questions regarding their working arrangements, you can also check their ABN validity.
Contact the team at Shakespeare on 08 9321 2111 if you’d like to discuss how this may apply to your individual circumstances.
Our firm provides the information on this website for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.
Tax articles on this website are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.