by Nikki Marsh, CertIV Acct & Bkeepg
A big question for many Australian businesses is whether the person working for them is classified as an employee or an independent contractor.
It is crucial to understand the difference between an employee and a contractor as it affects your obligations for paying and reporting tax, superannuation and other entitlements.
What is the difference between an employee or contractor?
So how can you work out the difference between whether your worker is an employee or an independent contractor?
Firstly, an employee is classified as someone that works in your business and performs their work as a representative of your business while an independent contractor provides services to your business and performs work to further their own business.
By breaking down the differences in working arrangements, as per the table below, you can determine whether your worker is an employee or a contractor.
Employee | Contractor |
An employee cannot pay someone else to do the work. | A contractor can pay someone else to do the work – subcontract. |
An employee is paid by the hour for their work time, per piece of work or for a commission. | A contractor is paid for a job done based on a verbal or written quote provided. |
An employee will not use their own tools or equipment and if they do, they are paid an allowance for this. | A contractor will provide their own tools and equipment and does not get an allowance for this. |
An employee is not legally liable for fixing any faults as the employer is responsible. | A contractor is legally responsible for their work and for the cost of fixing any faults. |
An employer has the ability to tell the worker where and how to do their job. | Subject to the specific terms of the contract, a contractor can complete the work their way. |
An employee works within and is considered part of the employer’s business. | A contractor operates their own business independently from the employer and can accept or refuse additional work. |
Employee or contractor for superannuation purposes?
As per the Australian Taxation Office, you must pay superannuation to contractors who are deemed to be employees for superannuation purposes. But in what circumstances would a contractor be deemed an employee for superannuation purposes?
A contractor working under a verbal or written contract that is wholly or principally for their labour is considered an employee for superannuation purposes regardless of whether they have their own ABN.
The ATO states:
“You must 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).”
Practical examples of employee or contractor for superannuation purposes
As a practical example, a plumber that runs their own business has been subcontracted by a larger business to perform labour. The subcontracted plumber will be providing their own materials to perform the work. In this scenario, they would be classified as a contractor and not an employee for superannuation purposes.
However, if the plumber were to turn up with just their toolbox and have everything else provided by their employer so that they were providing only their labour, they would be seen as an employee for superannuation purposes. In this case, the employer would be liable to pay superannuation on the amount they pay to their contractor.
If you are unsure as to whether you need to pay your contractor superannuation, reach out to the experienced team at ABA for advice.
Payroll tax
Payments you make to contractors may also be subject to payroll tax if your agreement is considered a relevant contract for payroll tax purposes.
As per the Queensland Revenue Office:
“A ‘relevant contract’ is any kind of arrangement where you:
• supply services
• are supplied with services
• re-supply goods
Re-supply means supplying goods to someone else who performs a service in relation to those goods and gives them back:
• in an altered form
• as other goods that incorporate them.”
In Queensland, agreements involving services are generally always relevant contracts and these contracts are taxable unless an exemption applies – there are nine exemptions but only one needs to be satisfied. You can read our comprehensive article on payroll tax for more information.
As an example, if your contractor provides services for 90 days or less in total in any one financial year, they would be exempt. Again, if you are uncertain whether an exemption may apply, check in early with ABA's payroll tax specialist rather than risk a surprise tax bill!
Employee or contractor for Workcover?
All Queensland employers who employ workers must insure them against work related injuries or illnesses with a Workcover accident insurance policy.
When you hire a contractor to do work for you, you will need to establish whether you need to cover them, and this will depend on the arrangement between you both. As mentioned previously, if they are working under a contract of service, they are considered to be a worker.
If you need help in calculating the total amount of contractor payments to include in your wages declaration, your ABA Workcover specialist can help.
In all three of these cases, the same applies. You need to determine whether the person working for you is classified as a worker for the purposes of paying entitlements like superannuation, paying payroll tax and paying Workcover.
How can ABA help you?
The ABA Advice Beyond Accounting team of bookkeepers and accountants is highly experienced and can assist you with your compliance in relation to superannuation, payroll tax and Workcover.
If you are an existing client, speak to us about how we can add these compliance services onto your current service package.
Not a client? Contact us about a Free Discovery Meeting to see how we can help you grow your business, improve cash flow and save you time with your superannuation, payroll tax and Workcover compliance.