Contractor vs Employee

Are you choosing the right one for your business?

If your business is expanding and you’re about to take on either workers or staff, its important to understand the difference between hiring an employee or a contractor. Most businesses aren’t aware that there are distinctions between these two classifications and failing to adhere to specific obligations can result in financial ramifications.

This is a common issue that we see as accountants, and many a business owner has been stung without having a proper understanding of the law. Contractors and employees have different responsibilities, rights, and obligations so its important to know what’s what.

WHAT IS A CONTRACTOR?

A contractor run their own business and sell their services to others. They have a high level of control over the work they perform, including their working hours, location and how they operate.  

WHAT IS AN EMPLOYEE?

Employees work in someone else’s business. They are under the direction and control of their employer. This includes the type of work, the hours and location.

Although contracting can prove more cost efficient, there are common misconceptions around contractors that can affect you come tax time. For example, people that do short-term work are automatically contractors. This is not true; you can hire both employees and contractors for hiring for casual or infrequent work or specific tasks. Another misconception is that if somebody has an ABN, they are automatically a contractor. Again, having an ABN is not a deciding factor of whether to not someone is a contractor.

To decide what is right for your business, there are certain factors to consider:

• Superannuation
• Payment & Payroll Tax
• Insurance
• Hours of work
• Tools and Equipment
• Leave

Most business don’t know that a lot of contractors may need to be treated as an employee for super and workers compensation purposes.

There are also common indicators that will determine if an individual is a contractor or an employee. Things to look out for are:

• The amount of control over how work is performed – who controls the level of work? Whose instructions do they follow?
• Financial responsibility and risk – who carries the risk for making a profit or loss on each job?
• Tools and equipment – what is provided by who and are there allowances?
• Hours of work – does the person employed set their hours or is it determined by the place of work?
• Expectation of work continuing – is there a contract in place for ongoing work. What happens if something needs to be looked at after the job has been completed? 

SUPERANNUATION AND CONTRACTORS

Did you know that in certain situations you must pay superannuation for contractors who are deemed to be employees for superannuation purposes? This could include:

• If the worker works under a contract that is wholly or principally for their labour
• An artist, sportsperson or entertainer paid to perform, participate in any music, play, dance, entertainment, sport, display or promotional activity, or similar activity.
• A person paid to provide services in connection with any performance, presentation, or participation in these activities.
• A person paid to perform services related to the making of a film, tape, disc, television or radio broadcast.

TAX IMPLICATIONS

Employees and contractors are subject to different tax treatment and the misclassification can result in underpayment or overpayment of taxes causing financial issues for both parties.

Employees have tax deducted from their salary and receive compulsory superannuation payments from their employer. Contractors have to pay their own tax from their gross earnings, and also need to make their own superannuation contributions.

If there is one thing to take away from this, is that the onus to determine what’s what is on the EMPLOYER.

Even if you have an agreement with a contractor/employee and the ATO determines otherwise, they can enforce their rules.

If you need to know more about what constitutes as an employee or contractor, the ATO has detailed information and an online tool to check your working arrangement. The critical differences can affect you and your business during tax time.