Determining whether your worker is an employee or a contractor can often be a challenging task.
However, it is an important distinction to make. As an employer, the definition of your worker determines what tax and super obligations you have towards them. If a business misclassifies an employee, it impacts on superannuation guarantee (SG), PAYG withholding, workers compensation, and payroll tax.
In fact, if you inaccurately determine what your worker is, you could face serious penalties and charges. As a business owner engaging others, the onus is on you to get it right. Even if you engage a contractor and he tells you he is a contractor, the ATO can still decide otherwise. When the tax office believes he is an employee, it will be you who is responsible for paying the penalties. For example, you will owe him superannuation on top of what you have already paid.
Are they an employee or a contractor?
According to law, “…the distinction between an employee and an independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employer’s business, and a person who carries on a trade or business of his own.”
Some key questions to ask yourself include:
- Can the person subcontract or delegate others to do the work? (If yes, they could be a contractor)
- Are they paid on an agreed quote? (If yes, they could be are a contractor)
- Do they provide their own tools and equipment? (If yes, they could be a contractor)
- Are they legally responsible for their own work? (If yes, they could be a contractor)
- Do they operate their own business independently of yours? (If yes, they could be a contractor)
Apprentices, trainees, labourers and trades assistants should always be treated as employees.
Companies, trusts and partnerships should always be treated as contractors.
If you have hired an individual, the details of their working agreement (including whether they are an employee or contractor) should be within their contract.
Though, no single factor is determinative. If you engage contractors, it is essential to get the facts of the relationship right. Business owners need to take a proactive approach to reviewing arrangements to ensure that the business is not exposed to material liabilities.
If you require any further help with understanding your tax and super obligations to employees and contractors, you can chat to one of our small business tax champions.