Articles

Tax Advice

Tax: employee or contractor?

It is critical you correctly classify a worker as either an ‘employee’ or a ‘contractor’. If your worker is in fact an employee there are significant taxation and superannuation consequences. So it is important to get it right.

The essential difference is that employees work in and are part of your business, while contractors provide services to your business through their own business.

Problems generally arise where you have paid a worker as a contractor and they are an employee and thus entitled to superannuation guarantee and other employment benefits.

An added problem is that the worker will generally only raise the issue after they have ceased working for you.

Thus, if a “contractor” has performed work for your business for a number of years as a contractor and they are found by the Australian Taxation Office (ATO) to be employees you will be responsible for backdated PAYG and superannuation guarantee payments.

The following factors are relevant:

 1.  Can the worker sub-contract?

 Contractors can pay someone else to undertake the work that needs to be performed.  Employees cannot.

 2.  Basis of Payment

 Employees are usually paid on a time basis (eg example hours worked), per item or activity performed, or by commission.

 Contractors however are paid upon achieving a particular result, at the price they have quoted. For example, a painter contracted by a retirement home to paint the interior of the units will not be paid until the units have been painted in the timeframe imposed and to the required standards.

 3.  Provision of Equipment, Tools and Other Assets

 An employer usually provides employees with the tools and equipment necessary for the performance of their work in the business. If the employee provides their own, the employer  will usually provide them with an allowance or reimburse them for costs of acquiring those tools and equipment.

 Contractors provide all or most of the equipment and tools necessary for the completion of their work. They do not receive an allowance or reimbursement for the cost of these.

 4.  Commercial Risks

 An individual employee does not bear any commercial risk in undertaking their work, as the business is the entity liable for the work the employee performs and for any costs of rectifying defects in the work performed.

 Contractors bear all the commercial risks and legal responsibility for the performance and defects in the performance of their work.

 5.  Control and Independence

 Employees perform work within the business in which they are employed and the business is entitled to direct the performance of the employee’s work. The employee is therefore not independent from the business.

 On the other hand, contractors enjoy freedom in the performance of their work as they operate their own business, separate to that of the business who contracts them for their services.

 Message:  

It is critical to correctly classify a worker as an employee or contractor.  If you don’t you could be liable for thousands of dollars in backdated PAYG, payroll tax and superannuation.  If in doubt you should seek expert legal advice.

Credentials

Recognition

Law Council of Australia
law society of new south wales
the tax institute
Transfer Pricing Association Global logo