Your business is buzzing along and you have now reached the point where you know you need some help. Now you have a couple of choices - either you can take on a contractor or you can employ someone.
If you’re employing someone who earns at least $450 in a calendar month then superannuation needs to be contributed on their behalf at the current rate of 9.5%. There is no superannuation to be paid in respect of a contractor.
In addition, an employee needs to have tax deducted from the wage and this tax is then remitted to the ATO.
For a time-poor small business owner who is mindful of cashflow, it may be tempting to simply take on someone as a contractor.
Correct? Well, no. It’s not that straightforward.
For tax purposes a contractor can be a pseudo employee So how do you distinguish between these two?
There is an essential difference between an employee and a contractor:-
An employee works in your business and is part of your business.
A contractor is running their own business.
This still doesn’t necessarily sound straightforward so lets dig a little deeper.
Can’t delegate or subcontract out the work. Can delegate or subcontract out the work.
Is paid for time worked, a price per item or Is paid for a result based on the quote they
activity, or a commission is provided. provided.
Tools and equipment are provided by the Required to supply their own tools and
Worker takes no commercial risk for defects. The workers takes all commercial risk and is The risk is borne by the business for defects. liable for defects.
The business has the right to direct the way The worker has freedom in the way the work
in which the worker does the work. is done, subject to any contract or agreement.
The worker is considered part of your The worker is free to accept or refuse
business. They don’t act independently. additional work. They operate their own
business independent of your business.
Still a bit confusing? Ok, this may help.
Some workers are always employees.
- Trades Assistants
Some workers are always contractors.
- Hiring a worker through a company, partnership or trust.
- Hiring someone from an agency or labour-hire arrangement.
Now lets debunk some popular myths.
If a worker has an ABN they’re a contractor.
An ABN makes no difference. You still need to look at the arrangement that’s in place.
Employees can’t be used for short jobs or to get extra work done during busy periods.
Yes they can. The length of a job or regularity of works makes no difference to whether a worker is an employee or contractor.
A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.
The 80/20 rule, as it is called, relates to how the contractor reports their income for their own tax purposes and has no effect on whether a worker is an employee or contractor for a business.
If a worker has a registered business name, they’re a contractor.
Having a business name makes no difference.
To sum up, if you’re looking at taking on someone, even for a short period of time, look at the arrangement that you are entering into before taking any steps. Trying to sort it all out afterwards can create far too many headaches.
If you need help in determining if someone you are about to take on is an employee or contractor give Mary-Louise a call on 0422 391 370.