The difference between a contractor and an employee is not always clear cut.  Under Australian employment law, the relationship between you and your employee is a contract of service, but the relationship between you and an independent contractor is a contract for service.  The differences can be subtle, but important.

An employee usually works full-time, part-time or casually and must work as the employer directs them.  A contractor usually works the hours required to do a task and has more control over the way they work.  But even these factors are not enough to decide whether someone is an employee or contractor.

The ATO also looks at the following factors when determining whether a worker is an employee or contractor for tax and super purposes.

Employee Contractor
Ability to subcontract/delegate: the worker can't subcontract/delegate the work – they can't pay someone else to do the work.Ability to subcontract/delegate: the worker can subcontract/delegate the work – they can pay someone else to do the work.
Basis of payment: the worker is paid either: for the time worked a price per item or activity a commission.  Basis of payment: the worker is paid for a result achieved based on the quote they provided. A quote can be calculated using hourly rates or price per item to work out the total cost of the work.
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 and other assets.  Equipment, tools and 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.Commercial risks: 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.Control over the work: the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement.
Independence: the worker is not operating independently of your business. They work within and are considered part of your business.Independence: 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.

Your tax, super and other obligations will vary depending on whether your worker is an employee or contractor.

If your worker is an employee you’ll need to:

  • Withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts to the ATO
  • Pay super, at least quarterly, for eligible employees
  • Report and pay fringe benefits tax (FBT) if you provide your employee with fringe benefits

If your worker is a contractor:

  • They generally look after their own tax obligations, so you don’t have to withhold from payments to them unless they don’t quote their ABN to you, or you have a voluntary agreement with them to withhold tax from their payments
  • You may still have to pay super for individually contractors if the contract is principally for their labour
  • You don’t have FBT obligations

Remember, it’s against the law to wrongly treat an employee as a contractor so if you need to check if you’ve got it right, contact our office on (07) 5413 9300 and talk to one of our knowledgeable accountants.