Employee or Contractor? Why You Need to Exercise Great Care with This Definition

If you are running a business, you'll want to keep your costs down as much as possible, especially when it comes to the biggest line item of all — wages. You know that taking on employees means a lot of extra paperwork and responsibility, and many people in your situation will look for alternatives where available. They may decide to engage the services of a contractor instead, but if you are thinking about going down that road, you need to exercise some care. What do you need to be aware of from a tax perspective in particular?

Working with Contractors

When you employ a contractor to do a given job, they will be responsible for their own tax affairs. You will pay them a set amount, and they will worry about any tax obligation, superannuation, and other levels of coverage. Typically, they also need to maintain their own public liability insurance, which should be primary in the event of any incident. All in, it sounds like a good deal.

Contractor or Employee?

However, the tax authority has been clamping down in this area, and they want to know if the contractor is truly independent or whether you have more than a passing say in what they do.

For example, if you give a major contract to a contractor and it amounts to most of their earnings potential, the ATO may suspect that this individual is an employee. If you give the contractor detailed instructions that tell them how to perform a particular task, this sets off even louder warning bells.

Working out Your Position

When you take on an employee, you are giving them instructions on what to do, and you are responsible for paying and protecting them to a certain extent. You are also responsible for payroll taxes, superannuation, leave entitlement, workers' compensation insurance, etc. The government is likely to earn more in terms of taxation from your employee than they are from a contractor doing essentially the same body of work. So they will apply certain tests if they suspect there is anything amiss to determine whether that individual can be classified as an employee.

Getting Expert Advice

Don't risk some significant fines and back taxes but ask an expert for their advice first. This is a good reason for you to take on a tax accountant, and they can also help you lodge an accurate end-of-year return.

For more information, contact a tax accountant near you.