Find out how we can help your business this end of financial year Learn More

Contractor vs Employee – Know The Difference

Ask many a business owner what their most valuable asset is and they’ll tell you it’s their employees. Employees are the lifeblood of most businesses and can often be the driver of the success (or otherwise!) of your business.

As a business owner looking to expand your workforce you may ask yourself whether you want to take on someone as an employee or an independent contractor. Each has their pros and cons, but from the perspective of managing your taxation affairs it’s important to get the distinction correct from the outset.


To be or not to be... Contractor Misconceptions

Firstly, let’s address a common misconception about contractors;
‘I have an ABN therefore I am an independent contractor’.

Whilst an independent contractor will likely have an ABN, this in itself is not enough to make you a contractor. If you are currently an employee sitting in an office somewhere using the resources of your employer and working at your employer’s direction, it is unlikely you would be considered an independent contractor simply because you went out and got yourself an ABN and started issuing invoices to your employer. This is because the ATO (for example) will take into consideration a number of factors in determining whether you are an employee or contractor.

As you’ll see below, making this distinction is critically important as it has an impact on certain obligations like PAYG withholding, superannuation and workers compensation.

What is a Contractor?

A contractor is normally someone responsible for the day-to-day running of their own business. They will use their own processes and equipment to complete their work, negotiate their own fees and are generally contracted for a specific purpose. They can often set up their own working hours and other arrangements. They may also work for a variety of clients at one time.

It’s worth noting that some workers can never be contractors and are always employees, for example apprentices and trainees. Furthermore if you hire a company, trust or partnership to do the work this will always be a contracting relationship. This is because an employee must be a person.

Defining a Contractor vs an Employee

To work out whether a worker is an employee or contractor you need to look at the complete working arrangement, including the specific terms and conditions under which the work is performed. The ATO for example will generally consider all of the following factors together:

  • Ability to sub-contract/delegate

If your agreement or contract gives the worker the right to pay another person to do the work then this would indicate a contactor relationship. An employee can’t sub-contract or delegate their work.

  • Basis of payment

If the basis of the amount you agree to pay the worker is a set amount per period this is an indication of an employment relationship. If you pay a quoted price for an agreed outcome this is more indicative of a contractor arrangement.

  • Equipment, tools and other assets

Employees are generally not responsible for providing the resources required to complete their work. Contractors on the other hand will likely be responsible for providing the equipment, tools and other assets (such as heavy machinery or motor vehicles) needed to perform the work.

  • Commercial risk

A contractor will generally bear the legal risk and/or be financially liable for rectifying any defects in their work. Employees generally don’t face commercial risks as this lies with the employer.

  • Control over work

An employee will normally have limited control over things like where their work is done, how it is carried out and during what hours. Contractors however will have more discretion on this front (subject to any terms and conditions in the contract or agreement).

  • Independence

A contractor will operate independently from your business with the ability to accept or refuse additional work. An employee works within your business and is considered part of your business.

An Employee is Deemed to be a Contractor – the Implications!

The classification of a worker as an employee or contractor has some of the following implications:

  • Superannuation

Employees are entitled to the current rate of Superannuation Guarantee (SG) of 10.5% on top of their gross wage. Contractors are responsible for making their own superannuation contributions. Care should therefore be taken in contractor arrangements as an employer could be liable for SG for a worker if they are deemed to be their employee, even if a superannuation amount has been factored into a contract rate with that worker.

  • PAYG Withholding

Employers are required to report wages information to the ATO, withhold tax from their employees, and pay the amounts withheld to the ATO. If a worker under a ‘contractor’ arrangement is subsequently deemed to be an employee, the employer could be liable for the PAYG Withholding of that worker.

  • Workers Compensation

Contractors are required to be covered in their own right for insurance purposes. Again care must be taken when engaging contract labour as employers can be liable for workers compensation on workers subsequently deemed to be employees.

For each of the above obligations there can be significant penalties if you get it wrong. This makes it vitally important to understand your exposure from the outset.

As explained above, it is very important to know the differences and subsequent implications when determining whether someone is a contractor or an employee. To clarify this distinction and avoid potential impacts on your business it's helpful to speak to specialists. Our team at BLG Business Advisers are Wollongong Accountants who service all around Australia and are here to assist you, so please talk with us.

Whatever you decide we wish you every success!

Blog-CTA_Business Advice

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is correct at the time of publishing and is subject to change*
Explore by Category

Are you ready to speak to a business adviser?

Let us show you how we can help.

If you’re more of a talker we’d love to chat, call us on 02 4229 2211

Talk with us

Schedule your chat

Do you have business challenges you need answers to?
Our team can help you. Fill out the form, find out if we are the right fit for you, then you can start receiving results!

close (3)

Related Reads

ATO Cracks Down on Superannuation Guarantee

Superannuation Basics – What and how much?

Employers in Australia generally have an...

Hiring Employees – Preparing & Finding

How to prepare for your first hire

There are a few practical components you need to be aware...

mail (1)

Get business advice that helps you, no matter what stage of business you’re in.

Yes, an email that matters!