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Tax time: Small job detail could have big tax implications

Contractors need to manage their own GST and make tax payments directly to the ATO.

Compilation image of people walking to work and a hand fanning out $50 notes to represent tax and money
The tax obligations of employees and contractors are very different. (Source: Getty) (Samantha Menzies)

No matter what industry you work in, it’s vital to know the difference between employees and independent contractors, especially when it comes to tax time. So, whether you’re a worker or employer, here’s everything you need to know.

Am I a contractor?

Contractors are self-employed people engaged for a specific task with a specific goal at an agreed price, often over a set period of time. They set their own hours of work and are paid a fee for completing each set assignment rather than receiving a salary or wage. Once an assignment is finished, a contractor can move on to a new assignment with the same different business or a different one. Contractors can also work for more than one business at a time.

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Independent contractors are effectively treated like a small business, and this set up comes with a range of tax implications such as having to manage your own goods and services tax (GST) registration and payments, and paying your own income tax (rather than having it deducted by your employer).

Why do businesses like contractors?

Using contractors can give a business a lot of financial freedom, as it gives them the flexibility to hire and fire whenever needed in order to cover fluctuations in their finances. It also generally saves on both expenses and red tape.

What is the benefit of being a contractor?

Freedom to choose your clients, hours and rates is the key benefit of working as a contractor. But the disadvantage is that it offers little-to-no job security, a lack of access to traditional employee rights and considerably more paperwork.

Compilation image of cash and tax time on post it note
Tax time is just two months away. (Source: Getty)

So, am I an employee or contractor?

As a basic rule, if you’re engaged just for your labour, you are considered an employee rather than a contractor from a tax point of view. This might sound simple, but it quickly becomes quite complicated. Although some believe that having an Australian business number (ABN) is enough to qualify as a contractor, the table below demonstrates that there’s much more to consider.

Here is a summary of the differences between being an employee or a contractor:

Employee vs contracter exlpainer table
(Source: Supplied)

What is the difference between employee and contractor when it comes to tax?

The tax obligations facing the two types of worker are very different: Employees have tax deducted from their salary and receive compulsory superannuation payments from their employer. Contractors have to pay their own tax from their gross earnings, and also may need to make their own superannuation contributions (note to employers: businesses still have to provide superannuation to some contractors even though they are not legally employees).

The burden of making sure you are working under the right conditions rests with the hiring business. If they incorrectly – based on the facts – deem you to be a contractor when you should be treated as an employee, the business should account for PAYG (pay as you go) on your wages, pay you superannuation and give you annual leave and long service leave.

The Fair Work Act prohibits "sham contracting arrangements", where an employer treats a worker as an independent contractor in an attempt to avoid giving employee entitlements. It is illegal for a business owner to convert staff into contractors. Employers who try to do this can face prosecution for tax evasion and may be penalised for disobeying superannuation laws and avoiding workers compensation laws.

Still not sure if you're an employee or contractor? Talk to H&R Block. Our experienced tax consultants will be able to help. Call 13 23 25 for details or find your nearest office and book an appointment online.

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