By Ross Vile and Ollie Visser
What’s The Difference?
You’ve heard the terms ”employee” and ”contractor” thrown around but what do they actually mean? How are the two different?
Generally, an employee is a person who works for your business, engaged in what is referred to as a “contract of service”, while a contractor is someone who runs their own business or works for themselves and you engage them in a “contract for service”.
There are a number of further indicators as to whether a person is an employee or a contractor, some of the common ones include:
It is important to consider the taxation and superannuation obligations of employees and contractors when deciding the best fit for your business.
For employees you are required to pay:
- a compulsory 9.5% superannuation contribution on earnings more than $450 per month if the employee is over 18 years of age
- PAYG withholding to the ATO based on the employee’s wage
Contractors generally handle their own taxation and superannuation obligations, however in an instance where the contractor is mainly engaged for their labour, superannuation may be payable.
To further complicate things, the distinction between employee and contractor is important when assessing Payroll Tax, Workers Compensation Insurance and other liabilities.
Confusion arises as the legislation in respect of these obligations has different and specific definitions of employee and contractor, therefore care should be taken.
Consequences of Getting it Wrong
Mistakenly treating employees as contractors can have major consequences.
Penalties equal to the amount of PAYG that should have been withheld, or superannuation that should have been paid may be imposed, together with interest charges and administrative penalties.
There is no right of recourse against a contractor to reclaim these amounts from them, although they may receive the benefit of the extra payment.
Also note that employees purporting to be sole traders with an ABN cause a particular risk especially if they are primarily engaged to provide labour.
The ATO has put out guidance regarding this question and other myths surrounding this subject on there website here.
For more information about the key differences between employees and contractors as well as the associated obligations and liabilities please visit Australian Government Business help website – Independent-Contractors.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.