It is important to know the differences between an employee and a contractor (also called an independent contractor or sub-contractor) as this will affect employer’s responsibilities and obligations, such as paying superannuation contributions and withholding tax from gross payments.
A worker isn’t automatically a contractor just because they have an ABN with specialist skills or a business only need them during a busy time. You need to consider the entire working arrangement. Following points need to be considered while reaching a conclusion on whether a worker is an employee or contractor –
- Basis of payment – an employee is paid for the time worked or commission basis. Whereas a contractor is paid for result achieved on the quote they have previously provided.
- Equipment, tools and other assets – A business will provide all necessary equipment, tools and other assets required to an employee to enable them to complete the work or in case employee provides most of the equipment, they are then paid either an allowance by the employer or get reimbursed by their employer for the cost of equipment, tools and other assets. Whereas in case of a contractor, contractor will provide all equipment, tools and assets required to complete the work. A contractor only receives payment upon completion of work, they do not get reimbursed for the cost of equipment and tools used in completing their work.
- Commercial Risks – the worker takes no commercial risks. Employer is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work. A contractor 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 work – An employer has the right to direct the way in which the worker does 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 is not operating independently of employer’s business. They work within and are considered part of the business. A contractor is operating their own business independently and performs services as specified in their contract or agreement and is free to accept or refuse additional work.
- Hours of work – An employee works standard or set hours (a casual employee’s hours may vary from week to week. A contractor on other hand will decide what hours to work to complete the task.
- Superannuation – An employee is entitled to have superannuation contributions paid into a nominated superannuation fund by their employer. A subcontractor pays their own superannuation.
- Tax – An employee has income tax deducted by their employer. A contractor pays their own tax and GST to the Australian Taxation Office.
- Method of Payment – An employee is paid regularly (for example, weekly/fortnightly/monthly). A contractor has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
If you’ve hired a company, trust or partnership to do the work, then the relationship is contracting for tax and super purposes. The people who actually do the work may be directors, partners or employees of the contractor but they’re not your employees.
Note – Having an ABN doesn’t automatically classify an individual as a contractor. If a contractor is demonstrating characteristics of an employee, then his/her employer must make superannuation contributions in their nominated superannuation fund.
An employer may attempt to disguise an employment relationship as an independent contracting arrangement to avoid responsibility for employee entitlements.
The ATO provides following penalties for contraventions of these provisions –
- PAYG withholding penalty for failing to deduct tax from worker payments and send it to the ATO
- super guarantee charge, made up of:
- super guarantee shortfall amounts (the amount of super contributions that should have been paid into a complying fund)
- interest charges
- an administration fee
- Additional super guarantee charge of up to 200%.
Unlike super guarantee contributions, the super guarantee charge is not deductible.
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