If you’re growing your business through hiring staff or using contractors, do you understand your obligations in each working arrangement? The last thing you want is to accidentally blur the lines between employees and contractors and find yourself in hot water with the ATO or Fair Work Ombudsman.
In this article we examine the differences between employees and contractors. We’ll walk you through how to figure out which working relationship is most appropriate and, most importantly, how to stay on the right side of the law when it comes to taxes, super, and reporting.
What is the difference between an Employee and a Contractor?
First things first, let’s clarify what we mean by employees and contractors.
Employees: They are part of your business. They work under your direction, receive a regular salary or wage, and enjoy perks like having their taxes sorted out by you and access to benefits such as leave.
Contractors: They run their own business. They’re hired for specific projects or timeframes, work independently, and handle their own tax and benefit affairs.
“Employees work in and are part of your business. Contractors are running their own business.”
Australian Tax Office
Making the Call: Employee or Contractor?
Now, here’s where things get a bit tricky. Deciding whether someone should be on your payroll or operating as a contractor isn’t always black and white.
There are considerable penalties and risks for incorrectly treating an employee as a contractor.
We highly recommend teaming up with experts like registered BAS agents, HR specialists, and FairWork to ensure you’re playing by the rules and avoiding any potential legal or tax headaches.
There are several factors to mull over when making this call:
- How much say do you have in how their work is done?
- Who foots the bill for tools and equipment?
- Are there set hours, and is the work likely to continue indefinitely?
- Whose paying for the appropriate insurances?
There is no single deciding factor that determines the nature of the relationship. All the factors need to be considered in the context of the whole working arrangement.
The table below (taken from the ATO) summarises the key indicators of an employee vs a contractor relationship. It is a starting point for determining which relationship is suitable.
Employee | Contractor | |
Control: your business has the legal right to control how, where and when the worker does their work. | Control: the worker can choose how, where and when their work is done, subject to reasonable direction by you. | |
Integration: the worker serves in your business. They are contractually required to perform work as a representative of your business. | Integration: the worker provides services to your business. The worker performs work to further their own business. They may choose to present themselves as part of your business. | |
Mode of remuneration: the worker is paid either:
| Mode of remuneration: the worker is contracted to achieve a specific result, and is paid when they have completed that result, often for a fixed fee.
| |
Ability to subcontract or delegate: the worker must perform the work themselves and cannot pay someone else to do the work for them. | Ability to subcontract or delegate: the worker is free to delegate to others who the worker will pay to complete the work on their behalf. | |
Provision of tools and equipment: 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 tools, but your business provides them with an allowance or reimburses them for expenses incurred.
| Provision of tools and equipment: the worker provides all or most of the equipment, tools and other assets required to complete the work, and you do not give them an allowance or reimbursement for the expenses incurred. The work involves the use of a substantial item that your worker is wholly responsible for. | |
Risk: the worker bears little or no risk. Your business bears the commercial risk for any costs arising out of injury or defect in their work. | Risk: the worker bears the commercial risk for any costs arising out of injury or defect in their work. | |
Generation of goodwill: your business benefits from any goodwill arising from the work of the worker. | Generation of goodwill: the worker’s business benefits from any goodwill generated from their work, not your business. |
We’ve had clients that have unknowingly used contractors who should have been employees. Take, for instance, a business with an admin staff member working on a contractor basis. It turned out they should have been on the payroll because:
- They were doing the same work regularly
- They used the business’s equipment to get the job done
- They weren’t insured or set up to work for other businesses.
Correcting this meant some extra staff costs, but it also meant less risk and better compliance.
Your To-Do List: Employees vs. Contractors
To ensure you can meet your tax, super and other obligations for employee you need to get all your paperwork sorted. Make sure you collect the essentials like:
- Tax File Number Declarations
- Superannuation Fund Nomination forms
- Current contact details
- Written agreement they have read and agree with your business policies and code of conduct.
You should also have processes in place for employees to update their details. Share new/updated policies with staff so they understand any change to their obligations.
For contractors, you need to make sure they are legit. Check their:
- Australian Business Number via ABN Lookup
- Registration for GST
- Valid, appropriate insurances
- Current contact information
- Valid tax invoices
It can also be a good idea to share your code of conduct with contractors to set expectations about appropriate behaviour.
Your tax obligations: Employees
When you hire employees, you need to:
- Withhold PAYG tax from their wages
- Pay superannuation to their nominated fund
- Report salary/wage, PAYG and super payments to the ATO via Single Touch Payroll (STP)
- Report and pay fringe benefits tax (if applicable)
Every year in July you must submit an end-of-year finalisation declaration through STP. This ensures employees can access information for their income tax declarations.
The ATO provides more information about your tax, super and reporting obligations regarding employees.
Your tax obligations: Contractors
Contractors are responsible for their own tax obligations, however if they don’t provide you with their ABN you may need to withhold from their payments.
There are circumstances where you need to contribute super for contractors if you are primarily paying them for their labour.
The ATO has put together a handy list of common myths about contracting that can help you better understand when contracting is and isn’t appropriate.
Some businesses (and government entities) may also need to report their payments to contractors by lodging a Taxable Payments Annual Report (TPAR).
Businesses that provide services in the following areas and pay contractors to deliver them may need to lodge a TPAR:
- building and construction
- cleaning
- courier and road freight
- information technology (IT)
- security, investigation or surveillance.
TPARs need to be lodged by 28 August each year. The fines for not lodging a TPAR are significant – in 2023 the ATO issued $18 million in fines for overdue TPARS to over 11, 000 entities.
Don’t be one of them in 2024 – work with a registered BAS agent (like Dream Admin) to get your TPAR lodged on time and with accurate information.
Wrapping up
Hiring employees vs engaging contractors is a pivotal decision for any business owner. Each comes with their own pros and cons. Understanding the distinctions between them is important for remaining compliant and meeting your tax and reporting obligations.
Remember, seeking guidance from accredited experts in payroll, tax and HR is critical. You don’t have to navigate the complexities alone!
If you need guidance around how to manage your employee or contractor obligations, book in for a free, no obligation consultation with Dream Admin Managing Director Tennille Skelly. Contact us at [email protected] or give us a call on 4821 2559.
