Suitable for: Any individuals are plan to register for an ABN as a sole trader and working as a contractor
Tax Difficulty: Beginner
Airtax Experience: First Timers
Time to read: 2-3 minutes
Employees vs Contractors
It can be a bold decision to leave the safety of the traditional workforce behind and do it alone, casting off the certainty of a 40 hour week and stepping into the exciting world of independent contracting.
Such a move comes with unparalleled freedom and autonomy. However, it can also be confusing. So, for first-time entrants into the flexible economy, what’s the difference between a contractor and the more-traditional employee, and how do you know which one you are?
|Contractor: Organisations turn to contractors when they require specialist skills but do not wish to (or cannot) bring these in-house. Generally, a contractor provides:
|Employee: An employee is usually considered a core part of their employer’s business. Generally, an employee is:
They cannot subcontract their work to others.
How does this impact your tax obligations and entitlements?
GST and PAYG obligations: As key members of an organisation, employees don’t have to pay GST and they have their Pay As You Go (PAYG) income tax withheld on their behalf by their employer. Contractors, by contrast, must generally pay their own income tax, and have to register for and pay GST (if they earn over $75,000 annually from their business).
Superannuation entitlements: Employees are entitled to a minimum 11% superannuation guarantee contribution from their employer. This isn’t automatically the case for most contractors.
But wait! Some contractors are entitled to superannuation payments if they’re paid wholly or principally for their labour. Where the contractual terms indicate that the individual is remunerated wholly or principally (for example, more than half of the total dollar value) for their personal labour or skills, the work must be performed personally by the contractor, and the individual is not paid to achieve a result (for example, paid on a time-basis rather than for a set outcome), the contractor may be eligible for superannuation.
Contractors can deduct a range of costs: Finally, contractors may be entitled to a range of deductions relating to the costs of running their business, including office equipment, depreciating assets, and travel costs. For employees, it’s generally assumed that the employer covers these costs, or reimburses the employee for them.
Know your terms before taking the plunge
The decision to leave the rat race for greener pastures is a monumental career step for many. Before doing so, however, it’s wise to know what kind of work you’ll be providing, how this work is likely to be classified by the ATO, and what obligations and benefits each category provides.
Thinking of taking the plunge and becoming a contractor or freelancer? Airtax makes GST filing and income taxes a breeze.
- Log in or sign up to Airtax
- Complete your BAS using our easy BAS form for your GST filing
- Alternatively, use our Income Tax Return services to complete you annual return efficiently and accurately