Determining the nature of the engagement – is the worker an employee or contractor? This is important from the tax and super point of view because employees will have tax withheld from their wages and super paid by the employer. In contrast, contractors may be treated differently.

Difference between employees and contractors
An employee is an individual who works in a business and is part of that business. A contractor is running their own business and is fully independent. Below are some factors that will help to determine whether a worker is an employee or contractor for tax and super purposes:

  1. Ability to subcontract or delegate
    • An employee can’t subcontract the work to someone else (they can’t pay someone else to do the work).
    • A contractor can subcontract the work to someone else and pay them to do it.
  2. Basis of payment
    • An employee is paid for the time they work, a commission, or a price per item/activity.
    • A contractor is paid for the result based on provided quote.
  3. Equipment, tools, and materials
    • An employee usually uses the business’s tools, equipment, and materials required to complete the work or gets reimbursed for using their own tools and equipment.
    • A contractor mostly provides their own tools, equipment, and materials to complete the work.
  4. Commercial risks and responsibility
    • An employee takes no commercial risks, as the business is legally responsible for the work done and is liable for the costs of rectifying any defects and issues associated with the completed work.
    • A contractor takes full responsibility for the work done and is liable for the costs of rectifying any defects.
  5. Control of the work
    • An employee is directed by the business in how the work is to be done
    • A contractor can perform the work in whichever way they wish to do so, subject to the contract or agreement
  6. Independence
    • An employee is not operating independently of the business, as they are part of the business they work for
    • A contractor is an independent worker running their own business and performs their services as per the contract or agreement and is free to accept or refuse additional work.

Individual workers like apprentices, trainees, labourers, and trades assistants are always treated as employees. Their work may be part of obtaining qualifications, certificates, or diplomas.

Companies, trusts, and partnerships are always treated as contractors. As they are not persons, this would be a contracting relationship for tax and super purposes.

To check if the worker is an employee or contractor, a business needs to review the whole working arrangement. One of the ways to do it is to use the ATO’s Employee or Contractor Decision Tool.

Have more questions or need further guidance? Feel free to reach out, we will be happy to help!

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