Employee V Contractor?

Do you have Contractors or do you have Employees?  Do you know the difference?

Are you in business and have hired Contractors rather than putting them on the payroll as employees?  They may still be classed as an employee despite not being paid through payroll.

An employee works in your business and is a vital part of your business.

A contractor is running their own business and provides services to your business.

If an employee, you'll need to:

• withhold tax (PAYG withholding) and pay that amount to the ATO on their behalf

• pay super in accordance with your obligations

• accrue and pay leave entitlements such as annual and personal leave

• report and pay fringe benefits tax (FBT) (if applicable)

• have arranged Workcover Insurance to cover the employees wages and super

If a contractor:

• they generally look after their own tax obligations

• there still may be an obligation to pay super if you mainly pay them for labour

• you may still have to arrange Workcover Insurance to cover amounts paid to the Contractor

• you don't have FBT obligations.

The ATO advises that “It's against the law for a business to incorrectly treat their employees as contractors. Businesses that do this are illegally lowering their labour costs by:

• not meeting their tax and super obligations

• denying workers their employee entitlements.

Businesses that behave this way can often undercut their competitors and obtain an unfair competitive advantage.”

The ATO website also states that its important to get it right because –

• “it affects your tax, super and other obligations

• penalties and charges may apply if you get it wrong, including:

·         PAYG withholding penalty – for failing to deduct tax from worker payments and send it to us

·         super guarantee charge, made up of :

o    super guarantee shortfall amounts – the amount of super contributions that should have been paid into a complying fund

o    interest charges

o    an administration fee

·         additional super guarantee charge of up to 200%”.

What is an employee?

If you are hiring an -

• apprentice

• trainee

• labourer; or

• trades assistant

they are always treated as employees. 

An employee can only be a person (i.e. not an ‘entity’ as referred to below). 

What is a Contractor?

If it’s a company, trust or partnership that is doing the work then that ‘entity’ is a Contractor for tax and super purposes. The people who do the work may be directors, partners or employees of the contractor but they're not your employees.

Same goes, if you hired your worker through a labour hire or on-hire firm and you pay that firm for any work the worker completes. Generally these firms will refer to your business as a 'host employer'.

There are a number of other factors to consider when determining if employee or contractor such as–

·         Does this person have the ability to delegate tasks that you give them to other people?

·         How is this person paid – i.e. per task, per hour or commission based?

·         Is this person providing their own equipment – i.e. tools, computer etc.

·         What control does this person have over how the tasks are completed?

·         Is this person operating independently of your business?

Click this link to be taken to an article the ATO has written listing a lot of the myths involved with Contractor v Employee and stated the actual facts (its actually a good read – you may be surprised!).

Another great tool the ATO has provide is the ATO Employee or Contractor Decision Tool.

 Amy

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