Contractors or Employees? Follow these guidelines to stay on the right side of the ATO.
Taking on a contractor can be the ideal solution to tackling a particular project or assignment that demands specialised skills or capabilities your regular employees do not have. Possibly you just require an extra pair of hands, for a limited period, to ensure you keep your company’s workflow on track? Or perhaps you’re keen to bypass the formal recruitment process and its incumbent employee obligations?
Before signing on the dotted line, though, it pays to remember that the Australian Taxation Office (ATO) may just view your contractor as an employee. And if this is the case, you could be liable for hefty penalties – as much as $51,000 – for what is termed "sham contracting" i.e. (incorrectly) identifying an employee as in independent contractor.
In some situations, this may be intentional. However, it would be a shame to incur such a substantial penalty because you simply weren’t up-to-date with the taxation laws. To help you stay on the right side of the ATO, we've put together this list of guidelines so you can more quickly determine if your newest recruit qualifies as a contractor or an employee. We have also become ‘myth busters’ where we identify myths and provide the facts.
1. Where and how they work
Employees are regarded as members of the business’s staff and, unless they’re working remotely, will fulfil their various work functions onsite. They’re usually obliged to handle whatever work is allocated to them and are expected to complete this work themselves. In other words, they can’t delegate their work to another employee.
The opposite applies to contractors who typically have their own ‘business’, and can choose where it suits them to complete a given assignment or project unless, of course, its particular nature requires them to work on the contracting firm’s premises. They’re also permitted to hire a sub-contractor or delegate the job to someone else if they wish.
2. How they’re paid
Employees are usually remunerated: on a set (agreed) basis for the amount of time clocked; per each unit or given task completed; and according to a set (agreed) commission structure.
Contractors usually sign an agreement which outlines the job they’re expected to complete (but not the finer details of how they’re required to do so), and a quote for the job. And while they’re entitled to request part of their payment upfront, the norm for contractors is payment upon completion of a project.
3. Tools of the trade
Employees are supplied with the equipment necessary for them to do their work be it computers, car-crushing machinery or anything in between. Should they require a specific tool the employer can acquire it on their behalf; allocate them an expense account; or reimburse them after the fact.
Contractors usually use their own tools to complete a given assignment or project. And should they need a specific item of equipment to complete a job successfully, they will cover the cost of the purchase.
4. The risk factor
Employees are not compelled to take on the burden of financial risk; they don’t stand to make a profit or loss – their employer does.
Contractors, on the other hand, will make a profit or loss on every job. And regardless of how quickly it takes them to complete a job, they’ll still only receive the agreed payment. If they manage a fast turnaround time, sure it’s a bonus, as they can move on to the next contract. But should the project take longer than anticipated or they need to put in extra time because the result was not up to par, they will most likely make a loss?
Employees are entitled to receive certain benefits from their employer. These include contributions to a nominated superannuation fund; paid leave (e.g. annual leave, personal/carer’s leave, long service leave); or a loading in the place of leave benefits if they’re classified as casual employees.
Contractors are usually liable for their own superannuation. That said, there are certain instances in which they may qualify for superannuation contributions, however, none in which they’d be entitled to receive paid leave.
Employees’ tax is always deducted from their gross income by their employer while contractors are responsible for filing their tax returns and making the requisite tax payments (including GST) directly to the ATO.
Employee or Contractor - So what are the Myths and Facts
When determining whether your worker is an employee or contractor, make sure you don't get caught out by these common myths:
- Having an ABN
- Common industry practice
- Short-term work
- 80% rule
- Past use of contractors
- Registered business name
- Contracting on different jobs
- Paying super
- Specialist skills or qualifications
- Worker wants to be a contractor
- Using invoices
For the ATO’s summary of these myths and facts, refer to the attached link https://www.ato.gov.au/Business/Employee-or-contractor/How-to-determine-if-workers-are-employees-or-contractors/Myths-and-facts/
Employee or Contractor – Calculator and Tools
The ATO has developed an Employee / Contractor Decision Tool to help make it so much easier for you to make the distinction. By answering a series of questions, you can quickly see whether the ATO will view your latest recruit as an employee or a contractor. So give it go and check your employee or contractor here https://www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/?2016TPNL
Determining whether a worker is an employee or a contractor can be a complex affair. There may be instances where a contractor is supplied the necessary tools by the contracting firm; is remunerated on a regular basis, or even qualifies for superannuation contributions.
If you consider that identifying a worker as a contractor when they’re in fact, an employee can have serious repercussions for your business, both financially as well as for your reputation, and potentially drive customers and future recruits away, it pays to ensure you make the right call the first time round.
So make use of the ATO’s decision tool and if you’re still in doubt contact SMART Business Solutions today on 0359 11 7000 or email@example.com.
We’re here to help you stay on the right side of the ATO.
Want to grow your business & improve cash ﬂow?
You need SMART solutions for YOUR business, not just annual tax compliance! Get the SMART team working with you. Call SMART Business Solutions today on 03 5911 7000