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Contractor or Employee?

 

It’s common in certain trades for people to be taken on as independent contractors rather than employees. Deciding whether a person is a contractor or an employee can be a minefield, both for the individual and for the business taking them on. Getting it wrong can have a big impact, with consequences both for you and for the business which has engaged your services.

 

What is contracting?

Contractors (or consultants as they are sometimes called) are self-employed people engaged for a specific task, at an agreed price, with a specific goal in mind, often over a set period of time. They set their own hours of work and take care of their own tax obligations. Contractors are paid a fee for completing an assignment. They don’t receive a salary or wage. Often, once an assignment is finished, the contractor will move on to a new assignment with a different business. Contractors will often perform work for more than one business at a time.

 

Why do businesses like contractors?

Many businesses like taking people on as contractors. It gives them the flexibility to ‘hire’ and ‘fire’ at will to cover peaks and troughs in the order book. It also generally saves on costs and red tape. Some people prefer the relative freedom of contracting, though others resent the lack of rights and job security.

 

Employee or contractor?

The basic rule is that if you are engaged just for your labour, you will be considered an employee rather than a contractor from a tax point of view.

Beyond that, it gets complicated! A persistent myth endures that if you have an ABN, you can be treated as a contractor. As our table below shows, there’s much more to it than that. To see the key attributes of an employee and a contractor and compare and contrast the two click here.

The tax obligations facing the two types of worker are very different. Employees have tax deducted at source from their salary and receive compulsory superannuation payments from their employer. Contractors have to pay their own tax from their gross earnings and also need to make their own superannuation contributions.

 

The Fair Work Act prohibits "sham contracting arrangements", where an employer treats a worker as an independent contractor in an attempt to avoid meeting employee entitlements. It is illegal for a business owner to convert staff into contractors. Employers who try it can face prosecution for tax evasion and can be penalised for flouting superannuation laws and avoiding workers compensation laws.

 

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