An employee works in your business and is a part of your business, whereas a contractor runs their own business.
The table below outlines six of the factors that, taken together, determines whether a worker is an employee or contractor for tax purposes.
Follow the links in the table for more information about each factor.
| EMPLOYEE | CONTRACTOR |
| Ability to subcontract: An employee can’t assign or delegate the work, i.e. they can’t pay someone else to do the work.
| Ability to subcontract: A contractor can assign or delegate the work, i.e. they can pay someone else to do the work.
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| 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 business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets. | 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: An employee takes no commercial risks. Your business is legally responsible for the work done by the employee and liable for the cost of rectifying any defect in the work. | Commercial risks: A contractor takes commercial risks and is legally responsible for their work and liable for the cost of rectifying any defect in his work. |
| Control over the work: Your business has the right to direct the way in which the employee does the work. | Control over the 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 for your business. They work within and are considered part of your business. | Independence: A contractor operates their own work independently for your business. They perform services as specified in their contract or agreement and is free to accept or refuse additional work. |
| Basis of payment: An employee is paid either hourly, weekly, fortnightly or monthly for the time worked, or for a price per item/activity or commission. | Basis of payment: A contractor is paid for the result achieved based on the quote they provided.
Similarly, a quote can be calculated using hourly rates or price per item to work out the total cost of work. |
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If you hire a worker you must check if they are an employee or contractor. It’s important because:
- It affects your tax, super and other obligations.
- Penalties and charges may apply if you get wrong.
Your Tax, Super and Other Obligations:
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 will 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 will 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.
Remember, it is against the law to wrongly treat an employee as a contractor. Businesses that do this are illegally lowering their labour costs by:
- Not meeting their tax and super obligations.
- Denying workers their employee entitlements.
So, you need to check that you have got it right. If you don’t get it right, penalties may apply.
Some workers are always employees…
Any of the following types of workers are always treated as employees:
- apprentices
- trainees
- labourers
- trades assistants
Apprentices and trainees do a combination of work and recognised training to get a qualification, certificate or diploma. They can be full-time, part-time or school-based and usually have a formal training agreement with the business they work for, which is registered through a state or territory training authority or completed under the relevant law.
In most cases, they are paid under an award and receive specific pay and conditions. The work arrangement for apprentices and trainees is employment. You must meet the same tax and super obligations as you do for any other employees of your business.
Companies, trusts and partnerships are always contractors:
An employee must be a person. If you’ve hired a company, trust or partnership to do the work, then it is a contracting relationship 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.
Labour hire or on-hire arrangements:
If you have obtained your worker through a labour-hire (or on-hire) firm and pay that firm for the work undertaken in your business, then your business has a contract with the labour-hire firm and they are responsible for the PAYG withholding, super and FBT obligations. Labour hire firms can be called different names including recruitment services and group training organisations (where your business is referred to as the ‘host employer’).
Hiring individuals?
If you’ve hired an individual, it is the details within the working agreement or contract that determines if they are a contractor or employee for tax and super purposes. The agreement or contract your business has with the worker can be written or verbal.
How can you work it out: Employee? Or Contractor?
To check if your worker is an employee or contractor, you would need to review the whole working arrangement. The easiest way is to use the Employee or Contractor decision tool.
You can use the Employee/Contractor decision tool to work out if your worker is an employee or contractor for tax and super purposes.
You have to simply answer the questions about the working arrangement and you will generate a report that you can keep for your records. If you answer each of the questions accurately and honestly, you can rely on the results.
If you are a worker and want to determine your employment status, you can use the Independent Contractors decision tool.
As mentioned above, if you outsource or run your contractors through an ‘on-hire company’ such as Pendragon, this in most cases, will alleviate you of any employee obligations, responsibilities and compliance and in most cases, you will also not be deemed to be the direct employer.
If you are still confused or in doubt as to whether your contractors would be deemed/viewed as employees or not, we are more than happy to have a look at your company’s individual circumstances and advise accordingly. Don’t hesitate to contact us on 02 9407 8700 or reach us at [email protected] to discuss it further.