Employee or contractor? This has been well debated. Depending on the structure of your business, you may have workers who are Employees or Contractors, or you may have both. Each has its merits, but it’s vital to know which are which so you can meet your tax and superannuation obligations.
When you have Employees, you must withhold PAYG tax, pay super, and report and pay fringe benefits. Contractors will usually look after their own tax obligations. However, you might still need to pay super, depending on the nature of their work.
It’s against the law to treat an Employee as a Contractor. Significant penalties apply if you do, so it’s essential to get it right.
The simplest way to remember is:
An Employee works within and is part of your business.
A Contractor is running their own business.
But how can you be positive that you’ve got an Employee or a Contractor on your hands?
Is there a point where you should be hiring a worker as a Team Member when you thought they were a Contractor?
There are six factors to consider:
Ability to subcontract or delegate
An Employee is not able to delegate or subcontract the work. They must perform their tasks themselves. If they are unable to finish the job themselves for any reason and someone else completes it, this is a substitution.
Contractors can delegate their work if the contract states they’re not obligated to do it themselves. If your contractor can’t work, they will organise another qualified person to complete it. The contractor would be paid as usual, and then they would pay their subcontractor.
Basis of payment
An Employee is paid a set amount per period. The most obvious example would be an hourly wage or annual salary.
Some Employees are paid piece-work rates. They receive an amount per the number of pieces produced or successful sales. The commission basis would be a price-per-item structure.
However, a Contractor is paid an agreed-upon price in exchange for a predetermined result. Some contracts will have the amount paid in increments as stages of the project are completed. But the main takeaway is that contractors are paid when the agreed-upon result is achieved.
Equipment, tools, and other assets
If your business provides the tools, equipment and other resources required to perform the job, that’s the characteristic of an Employee.
If the worker provides these items, they are more than likely a Contractor.
Commercial risks
Employees do not bear the commercial risk and are not liable for correcting any defects in the work at their own expense. Instead, your business takes responsibility. The Employee will be paid for the time taken to complete the task.
Contractors assume the commercial risk and are responsible for fixing mistakes in their own time. This extra work would be outlined in the terms set at the start of the project. Your business does not have to pay for any additional time taken or materials used. You only pay once the work has been completed.
Control over the work
Employees are required to complete their work the way the employer specifies. What tasks are done, how it’s completed, where it’s completed, and when it’s completed are all up to you. The Employee will then complete the work as required.
Contractors are not conditioned to the same rules. They decide how the work is completed as long as it meets the obligations written in the contract.
Independence
An Employee works within a business. They complete tasks as required until they no longer work for the business.
Contractors operate independently and may have other contracts going with other companies. They can openly accept and refuse other work. A Contractor’s obligation is complete when they deliver the specified outcome.
Final thoughts
It can be confusing to determine who is an Employee or contractor, but it’s vital that you understand in order to meet your tax obligations. The ATO has a great tool to help you determine the status of your workers.
If you have any questions, feel free to Join the conversation…