When it comes to paying your contractors, should they be treated differently? This topic can be confusing so we look at the differences between employees and contractors to make sure you’re on top of your employer obligations.
Here are some common myths about contractors
• if a worker has an ABN or business name they are a contractor
• employees can’t be used for short jobs or to get extra work done during busy periods
• if a worker is an independent contractor for one job, they will be an independent contractor for all jobs
• my business should only take on independent contractors so we don’t have to worry about super
• if a worker submits an invoice for their work, they’re an independent contractor
Every employee and contractor needs to be considered carefully to ensure you fulfill your tax, super and legal obligations as the employer. You are responsible for classifying your worker for tax and super purposes and you need to get it right. If you make an incorrect decision, you may face penalties.
Let’s look more closely at the differences between employees and contractors.
What is an employee?
Employees work in and are part of your business, and performs their work as a representative of your business. Apprentices, trainees, labourers and trades assistants should always treated as employees.
If you hired your worker through a labour hire firm and pay that firm for the work undertaken by the worker in your business, your business has a contract with the labour hire firm and not the worker.
If your worker is an employee you’ll need to:
• Withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts
• Pay super for eligible employees
• Report and pay fringe benefits tax (FBT) if you provide your employee with fringe benefits.
What is a contractor?
Independent contractors provide services to your business and performs work to further their own business.
If you are engaging a worker who you believe is an independent contractor, you can choose to pay them super to ensure you’re not liable for the superannuation guarantee charge (SGC). You will need to pay any super contributions directly to their chosen superannuation fund and should include this in your contract with the worker.
In certain circumstances, you must pay superannuation for independent contractors who are deemed to be employees for superannuation purposes.
These circumstances include if the worker:
• Works under a contract that is wholly or principally for their labour
• Performs work that is wholly or principally of a domestic nature for more than 30 hours per week
• Is a sportsperson, artist or entertainer paid to perform, present or participate in any music, play, dance, entertainment, sport, display or promotional activity, or similar activity
• Is a person paid to provide services in connection with any performance, presentation or participation in these activities
• Is a person paid to perform services related to the making of a film, tape, disc, television or radio broadcast.
If your worker is an independent contractor they generally look after their own tax obligations, so you don’t have to withhold tax unless they don’t quote their ABN to you, or you have a voluntary agreement to withhold tax from their payments. You may still have to pay super for independent contractors if the contract is principally for their labour. You will not have FBT obligations for contractors.
It is important to note that companies, trusts and partnerships are always contractors.
How do you know which to use?
To work out if your worker is an employee or independent contractor, you need to determine whether your worker is serving in your business. You do this by reviewing the legal rights and obligations in the contract you entered into with your worker. Just because they have an ABN and invoice your company does not automatically make them an independent contractor for wage and super purposes.
It is crucial that you accurately characterise the nature of the business that you carry out. You should examine the essential activities of the business that you operate and compare them with the legal rights and obligations contained in the contract you entered into with the worker.
Consequences of employees treated as independent contractors
It’s against the law for a business to incorrectly treat their employees as independent contractors. Businesses that do this are illegally lowering their labour costs by not meeting their tax and super obligations, and denying workers their employee entitlements.
Businesses that behave this way can often undercut their competitors and obtain an unfair competitive advantage. There are penalties for not characterising contractors correctly.
Still need more information to determine if your contractors are actually contractors? You can read more on our factsheet here or contact us for assistance.
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