Tax tips, contractors, ato, tax, startups, small business, startups

A common area of confusion for startups and small businesses, is whether or not their new hire is in fact a contractor or an employee. It is important that the difference between a contractor and an employee is clear, as they come with different outcomes and different responsibilities.

Determining whether your new hire is a contractor or an employee

The ATO lists six factors which need to be considered in determining who is a contractor vs employee:

  1. Is your hire able to sub-contract/delegate? An employee can not sub-contract/ delegate and pay someone else to carry out the work, whereas a contractor can.
  2. What is the basis of payment? A contractor is paid for achieving a result, whereas an employee is based on hours worked/commission/price per item.
  3. Who provides the equipment, tools and other assets? A contractor provides the majority of the equipment, tools and other assets they use and doesn’t get paid an allowance for these. Whereas, an employee does not provide the majority of equipment, tools and other assets and in instances where the do, they are reimbursed for these costs.
  4. Who takes the commercial risk? Contractors take on the commercial risks, being legally responsible for their work. An employee on the other hand does not take on the commercial risks which are borne by your business instead.
  5. Who has control over your hire’s work? Contractors, subject to the terms in your agreement with them, can exercise freedom in the way they carry out their work. Whereas, workers are more bound by the employment terms of your business. Contractors operate independently from your startup whereas employees are part of your business.
  6. Is there independence?

You may also find using the ATO’s online Employee/contractor decision tool useful in reaching a decision on the above.

What are the different tax requirements

  • When hiring contractors vs employees, there are four key differences when it comes to tax which you need to be on top of:
  • Withholding Tax
  • GST
  • Superannuation
  • Leave Entitlements

This Tax Tips Tuesday is brought to you with love by Nudge Accounting. You can read other Tax Tips here.