Whether you’re an employer or a person who considers themselves self-employed, it’s important to know the difference between what the Australian Taxation Office (ATO) sees as an employee and a contractor to ensure you are meeting your tax and super obligations.
Many people believe that a worker is automatically a contractor if they have specialist skills, you only need them during a busy time and/or they have an Australian Business Number (ABN), but that’s not always the case. The entire working arrangement needs to be considered when determining if a worker is a contractor or an employee.
Here’s an easy-to-follow comparison chart explaining the key differences.
| Employee | Contractor | |
|---|---|---|
| Hours of work | Hours generally set by the employer | Decides what hours to work to complete a specific task |
| Degree of control | Performs work under the direction and control of the employer on an ongoing basis | Has a high level of control in how work is done |
| Expectation of work | Has an ongoing expectation of work | Is usually engaged for specific tasks |
| Risk | Bears no financial risk | Bears the risk for specific tasks |
| Superannuation | Is entitled to have super contributions paid | If you engage a contractor mainly for labour, you are responsible for paying super. See note below. |
| Tools and equipment | Provided by the employer or a tool allowance paid if employee chooses to use their own | Is responsible for providing their own tools and equipment |
| Tax | Income tax deducted by the employer | Pays their own GST and tax |
| Method of payment | Paid regularly (eg. weekly, fortnightly or monthly) | Has an ABN and submits an invoice when the work is completed |
| Leave | Entitled to receive paid leave or loading in lieu of leave (casuals) | Has no entitlement to paid leave |
NOTE: If you pay independent contractors mainly for their labour, they are employees for superannuation guarantee (SG) purposes. You may need to pay super to a fund for them.
It doesn't matter if the independent contractor has an Australian business number (ABN).
Make super contributions for independent contractors if you pay them:
- under a verbal or written contract that is mainly for their labour (more than half the dollar value of the contract is for their labour)
- for their personal labour and skills (payment isn't dependent on achieving a specified result)
- to perform the contract work (work cannot be delegated to someone else).
If you need further assistance, the ATO’s online employee/contractor decision tool can help you determine if someone is a contractor or an employee. Please note, this tool does not consider other obligations such as payroll tax and workers’ compensation requirements.
Read our people section for more useful information on your obligations as an employer or call us on 133 140 to use our free small business advisory service.
