RSM Australia

Employee or Contractor - Busting the Myths

Tax Insights

Determining whether your worker is an employee or a contractor is a complicated issue and one that in which business owners often make mistakes.

Is your worker a employee or a contractor? A business needs to know the difference!Contracting has emerged as an alternative to the traditional employment relationship and is sometimes necessary, when you require specialist skills that cannot easily be obtained by recruiting an employee. Contracting can also prove more cost efficient than employment. However, there are dangers in engaging an individual as a ‘contractor’ without having a proper understanding of the law.

“You will start work at 8:00AM Monday. I have all the tools you need here, and I will pay you $25 an hour until the job is done. And by the way can I please have your ABN.”

The worker in the above example is clearly an employee, yet by asking for an ABN, their boss intends to treat them as a contractor.

Why does it matter if your worker is an employee or contractor?

An employee is entitled to receive superannuation, leave and Workcover entitlements and must have tax withheld from their pay.

A contractor, however, is responsible for their own tax, superannuation and Workcover.

The paperwork involved in having an employee is obviously substantial and time-consuming, which along with avoiding paying superannuation and tax are the most common reasons why workers are incorrectly treated as contractors.

How do I tell the difference between a employee and a contractor? 

There is no single criteria that can conclusively determine whether you worker is an employee or a contractor which is why mistakes are often made.

  • A contractor will typically supply their own equipment, do the job when and if it suits them, and be paid to produce a result.
  • An employee is generally paid by the hour, uses your equipment, and does what you tell them when you tell them!

They have an ABN so they must be a contractor?

Wrong! Just because a worker holds an ABN does not in any way make them a contractor. As an employer, it is your responsibility to ensure you adopt the correct treatment as you are the one in the firing line.

What are the penalties for getting it wrong?

The penalties for failing to pay superannuation and PAYG withholding can be quite severe, and it is an area that the tax office has been targeting heavily. It only takes a random ATO review or one disgruntled employee to report you before you find yourself in a world of trouble with the tax office.

Think also for a moment what would happen if one of your workers were severely hurt or killed while working on your farm.
What would the consequences be for the farm if you did not have a Workcover policy in place because you were under the false impression that your worker was a contractor?

If you are unsure about your situation, the tax office has a decision tool available on their website to help determine whether someone is an employee or a contractor.  

Alternatively, contact the Team at RSM to review your individual circumstances.

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