What’s the difference between contractors and employees


Contractors and employees – what’s the difference?

Before hiring a worker you need to check if they are to be engaged as an employee or a contractor.

It’s important you get this right because it affects your tax, super and other obligations. If you wrongly treat your employees as contractors you risk having to pay penalties and charges, and these can be significant.

If you’ve previously hired a worker without checking whether the arrangement is employment or contracting, you should review your earlier decision now to ensure the arrangement is correctly classified.

Some workers are always employees

If you hire any of the following types of worker you need to treat them as an employee:

  • Apprentices
  • Trainees
  • Labourers
  • Trades assistants

Companies, trusts and partnerships are always contractors

An employee must be a person. If you’ve hired a company, trust or partnership to do the work, then the relationship is always contracting for tax and superannuation purposes. The people who actually do the work may be directors, partners or employees of the contractor but they’re not your employees.

If you’ve hired an individual (sole trader), you need to work out if they’re a contractor or employee. This depends on the specific circumstances of the working arrangement.

Factors that will determine whether someone is a contractor or an employee

An employee works in your business and is part of your business. A contractor is running their own business.

You need to look at the whole working arrangement. The table below outlines six of the factors that, taken together, determine whether a worker is an employee or contractor.

Employee Contractor
Ability to Subcontract / Delegate:
The worker can’t subcontract/delegate the work – they can’t pay someone else to do the work. The worker is free to subcontract/delegate the work – they can pay someone else to do the work.
Basis of payment:
The worker is paid:

·         for the time worked

·         a price per item or activity

·         a commission


The worker is paid for a result achieved based on the quote they provided.
Equipment, tools and other assets:
Your business provides all or most of the equipment, tools and other assets required to complete the work, or the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools or other assets. The worker provides all or most of the equipment, tools and other assets required to complete the work. The Worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.
Commercial Risks:
The worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work. The worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
Control over the work:
Your business has the right to direct the way in which the worker does their work. The worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement.
The worker is not operating independently of your business. They work within and are considered part of your business. The worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.

If your worker is regarded as an employee, your business will be responsible to withhold tax from their payments (PAYGW) and additionally you will be liable for Superannuation guarantee on their behalf.  Superannuation guarantee must be paid quarterly to each employees nominated super fund (within 28 days of the end of the quarter).  If paid late (after the 28 day quarterly due date) the superannuation shortfall will be required to be paid to the ATO via the lodgement of quarterly superannuation guarantee statements.  Additionally the ATO will impose administration charges and nominal interest over and above the actual superannuation shortfall that is due.

The superannuation guarantee rate that is applicable for the years ended 30 June 2016 and 30 June 2017 is 9.5% of ordinary time earnings.

If you worker is an employee you will also be required to provide each employee with the option to elect which superannuation fund their superannuation guarantee will be paid into.  This option must be provided by the date the first super payment is due.  Penalties will apply for not providing employees with this choice.

Voluntary agreements for contractors

Voluntary agreements can be used where payments are made to genuine contractors that are not already covered by another PAYG withholding category, for example to employees or under labour hire agreements.  If you contractor enters into a voluntary agreement with your business, you must withhold tax on their payments at the following rate:

  • The contractor’s PAYG instalment rate (as advised by the ATO), or
  • A flat rate of 20% (if the contractors PAYG instalment rate is not know or is less than 20%)

If you have any questions about what constitutes a contractor or employee and these arrangements please contact our office on 07 5474 0711.

More small business accounting tips & information

Noosa Small Business Accounting & Financial Planning Services

Stratogen consists of a team of expert small business accountants and advisers dedicated to providing you with the highest quality of taxation, accounting and financial management services.

Additional business services include tax minimisation structuring, business valuations and due diligence, business restructuring and audits.  We also provide professional bankruptcy and insolvency advice to Accountants, Financial and Legal Advisers, Corporations and Individuals. Our primary goal is to ensure all parties are treated with respect.

Our accounting firm’s head office is located at Noosa on the QLD Sunshine Coast.  Our expertise is unparalleled and thus we work with clients residing and working in Noosa, Mount Isa, interstate around Australia and internationally.

Call (07) 5474 0711  Email Us  Make an Enquiry

noosa accountants financial advisors sunshine coast queensland