Contractor Or Employee – What’s The Difference?

Hiring an employee can be a time consuming and expensive process as such businesses now are also considering the option where plausible to engage a contractor to perform the same work an employee would. However, a business wanting to engage a contractor instead of an employee must know the differences between the two and what the Australian Taxation Offices definition of a contractor and employee are in order to avoid hefty penalties and protect the business from potential legal claims against it. By understanding the distinctions between a contractor or employee, you will know what is best for your business from the outset to maximize return from the business’s investment in human capital and minimize the cost of the investment.

In general terms, employers need to in addition to paying the wage of an employee need to at a minimum for a casual employee pay Superannuation and insure employees through Workcover or a Workcover equivalent depending upon which state you employee in. If you choose to hire a permanent employee, than as an employer you will need to also consider holiday and personal leave entitlements, long service leave, pay for public holidays and the cost of processing and keeping the required payroll records for the employee.

If you choose to engage the services of an independent contractor on the other hand and the contractor successfully passes as a contractor using the decision tool listed on the Australian Taxation Office’s website at these same employer expenses and benefits do not apply. You must be certain when engaging the services of a contractor that the individual is actually a contractor because if you fail to classify the individual as an employee when they are an employee and not a contractor, you may have to pay the individual for missing wages, entitlements and superannuation that as an employer you were supposed to pay under government legislation.

Unfortunately there is no single indicator that will help you identify whether the individual is an employee or a contractor, generally it depends on the amount of control you exercise over the individual’s job role, if the individual provides their own tools and equipment, if the individual has more than one client and if the individual sets their own work hours. Some key rules that determine whether the individual is an employee or contractor are:

– Does the worker have an Australian business number (ABN)?

– Is the agreement made with a company, partnership or trust (other than a labour hire firm) and payments made to that company, partnership or trust for the services of the worker?

– Does the agreement you have, give the worker the right to pay another person to do the work instead of them?

– On what basis do you make the payment to the worker?

– Do you or the worker provide any equipment, tools of trade, plant or vehicles to perform the work (excluding incidental use)?

– Is the worker liable for the cost of rectifying any defect in the work performed?

Contractors are paid to deliver a result for the business which contracts them. Contractors may also have control over their own workers which gives them the ability to delegate or sub-contract workers in order to deliver the sought after outcome. A contractor will generally have tools, equipment and any other assets of their own that are necessary for completion of the work. Commercial risks are taken by contractors as they are primarily responsibility for their own work and are liable for the cost for rectifying any type of defect. There will generally also be a written contract between the contractor and the business which contacts them which will generally define a set period for the work to be performed, the cost for the work performed, material to be used, key milestones which may dictate payment and other terms and conditions.

Meanwhile, employees are primarily part of a business and work in it. The business has the authority to direct the worker as they see fit. An employee cannot delegate or sub-contract their work and cannot pay just anyone to execute the work. Employees are paid based on the activity or item, commission and or time they have worked by submitting a time sheet for the payroll period. Employees are provided with most or all of the necessary tools, equipment, and any other assets that is required in order to complete their jobs successfully. Employees generally receive a reimbursement or allowance for any out of pocket expenses in the course of their employment. Lastly, it is the business’s responsibility for the work undertaken by employees as well as any liability or defect that may arise from the employee working on behalf of the business.

Advantages Of A Self Managed Super Fund


Australian citizens in the past have not been known for their tendency to save significant amounts of money for their retirement, which is why the government established a compulsory superannuation program where the employer that sets aside a percentage of the employees earnings for their own retirement. Generally employers have deposited these funds on the employees behalf into industry regulated Superannuation Funds. However, in more recent years a significant number of Australians now prefer to manage their own superannuation funds because they have learned of the many benefits this approach can offer. Among these Self Managed Super Fund or SMSF advantages are as follows: Greater Choice for Investment SMSF offers great investment flexibility in many assets including listed and unlisted domestic and overseas options, managed funds, bonds, trusts, and shares. It offers flexibility in owning commercial real property and residential property. It allows SMSF owners to make an adjustment to their portfolios that coincide with corresponding changes in the market through hands-on investment.

Full Control SMSF offers full control over your own superannuation assets and gives you flexibility in making your own decisions on how to best invest the assets held in your superannuation fund all within regulatory guidelines.

However you must be proactive in managing your super fund in order to achieve your investment objectives. SMSF allows you to invest in shares, property, cash, or any other assets suitable to your SMSF investment objectives. The downside of being totally in control of your SMSF investments is you must have the ability to discern which investments will yield good results or have the input of a financial planner or accountant which can provide guidance in relation to such matters. Tax Planning and Concession SMSF may form a large component of your overall investment strategy. Your super fund may serve as a tool for tax planning primarily because of its flexibility as well as its low barriers in realising your objectives. It can also be used as a powerful strategy in generating income by means of concessions. This can be in the form of capital gains taxed at 10%, utilisation of franking credits from dividends, concessional taxation of pension benefits and end-benefits, and concessional 15% tax rate for SMSF income. Succession Planning SMSF can become the best succession planning tool as it allows you to leave carried tax losses to the next generation. It provides ease of use through reversion of your own death pension to your spouse. This prevents any hassle on the part of your spouse filling out industry super fund’s paper work just to prove their identity and claims for eligibility. SMSF authorises you and any other authorised individuals to take control of the cheque book. Estate Planning SMSF can be considered a multi-generational family benefit that is long-term. This can be very useful tool for those individuals who are long term minded and are interested in creating a legacy which is multi-generational. Lower Fees and Better Investment Performance Under Australian law, SMSF members are not required to pay the management fees which are mandatory when investing with an industry regulated superannuation fund. It is also noted that SMSF investments have better performance when compared to the industry regulated super funds from 2006 to 2008 data. However, a SMSF is required to be audited annually to ensure it adheres to regulatory guidelines and commonwealth law in Australia which can be costly exercise.

Advantages of Salary Sacrifice

Sometimes being an employee seems to offer minimal tax breaks and limited rewards compared to individuals who operate a business to derive their income – enter salary sacrificing. Lets take a look at the advantages of salary sacrifice.

Salary sacrifice is a practice carried out by employers in agreement with employees where the employers reduce the amount of take home pay which employees are entitled to in return for the employer to pay a nominated amount towards what the employee has specified. By doing this the employee effectively reduces their taxable income and thereby lowers the amount of tax that is required to be taken out of there salary by the employer and by doing so has the employer pay off generally a debt obligation, fees or an asset of some sort which the employee wishes to buy or pay.

Salary packaging or sacrificing is used as a recruitment and retention tool by employers that assists companies compete and retain highly-skilled individuals which can be seen as adding value to a company. It is regarded as a compensation strategy holding benefits for employees and employers alike. Salary sacrificing is used frequently in public sector jobs and is one of the lures that make’s public sector jobs highly sought after. However the private sector also is entitled to offer salary sacrifice and does so but more often this is available in larger companies.

Employers need to be aware that salary sacrificing can attract a different kind of tax which needs to be considered called fringe benefits tax. Fringe benefits Tax is incurred where the employer is seen to gain a financial advantage or benefit from their employer as remuneration for the services that they provide for example a car, accommodation, equipment or a cheap loan amongst other things. Fortunately not all items which can be salary sacrificed incur fringe benefits tax for example a mobile phone, laptop, briefcase or a trades persons tool amongst other items do not attract fringe benefits tax. Fortunately for the employee they do not need to involve themselves in researching fringe benefits tax because it is the employer who needs to pay this and not the employee. For a comprehensive understanding of what a fringe benefit is visit the Australian Taxation Offices website.

In closing, salary sacrificing makes sense where an agreement can be reached between the employer and employee as there will likely be financial ramifications for the company. As this is the case the employer will need to look at the total value of the salary package and any fringe benefits tax that maybe incurred in offering salary sacrifice to an employee. Generally speaking though if an employer is able to come to agreeable terms with an employee who in turn receives a robust salary package often this will induce a higher sense of job satisfaction which will usually lead to retention of the employee well into the future.

Fringe Benefits Tax: What You Need To Know

Tax There are times when fringe benefits are considered significant forms of compensation for employees, but they can actually get employees and their employers into tax trouble if they are reported and taxed inappropriately. So it is important that employers are aware of the federal laws governing fringe benefits so employers are aware when they are applicable. Ignorance is never accepted as an excuse by the Australian tax office.

The value of both taxable and partially taxable fringe benefits is calculated by grossing up the value of the benefit using the Australian Taxation Office rates which you can view at

Many fringe benefits are non-taxable and need not to be reported by the employers for withholding tax depending upon the realized value of the benefit. Fringe benefits ultimately help employees reduce the amount of tax which needs to be remitted on their behalf so the end gross value of the employees pay cheque and goods or services should exceed what they would have received had they simply received a pay cheque. Fringe benefits tax is payable by an employer who is deemed to have provided a fringe benefit to their employees.

Note that the rate of fringe benefit tax is independent of the amount of income that has been received for the financial year as currently the fringe benefits tax rate in Australia is 46.5%. Such taxes are to be paid by the employer directly to the tax office for any fringe benefit tax which has been incurred. It is worth noting that fringe benefits tax may still be applicable even if the benefit is offered to an associate or third party of the employee or through an arrangement made by the employer. This can be best defined as a direct or indirect benefit provided by an employer to an employee or individual nominated by the employee for services provided or services to be provided by the employee to the employer.

Moreover, some fringe benefits are taxable while some are not, these include:

  • · A portable electronic device.
  • · An item of computer software.
  • · An item of protective clothing.
  • · A briefcase.
  • · A tool of trade.

Further to this employers also need to consider that a threshold exists which is nominated by the tax to if the employee would have purchased these items or services on their own using their net income after tax. Fringe benefits often permit an employee to increase the value of the remuneration they receive from an employee for the services the employee provides. office which exempt employers from incurring a taxable fringe benefit whilst not exceeding the threshold. The threshold is nominated at $300 per employee and whilst the benefit which the employer provides remains at or below this amount most benefits will be exempt from fringe benefits tax.

Fringe benefits have positive factors for employees as they provide them access to valuable items and services at a cheaper cost when compared.