Contractor vs. Employee

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Twelve common myths you need to know about contractors and employees

The Tax Office warns that there are common myths that employers and workers may fail to understand, and in turn make assumptions that can cause costly tax mistakes. When it comes to deciding whether a worker is an employee or a contractor, the answer may not be as easy as you think. Here are 12 common myths that may help clear up any confusion you may have.

Having an Australian Business Number (ABN)

Myth: If a worker has an ABN then he is automatically a contractor.

Fact: Just because a worker has an ABN does not necessarily categorise them as a contractor. The fact that the ABN is on the invoice has no bearing to the contractor status. To determine whether the worker is a contractor, you have to examine the situation in which the work is performed and the specific terms and conditions. Each case may be different so be attentive to the working arrangement and don’t let the worker dictate the status. 

Common Practice

Myth: Everyone takes on contractors, so my business should too.

Fact: Others may take on contractors regularly, that does not mean contractors are necessarily right for your business or situation. Don’t use “common industry practices” to make decisions or to determine worker status.

Short-Term or Temporary work

Myth: Employees cannot be utilised to perform extra work during busy times or on a temporary basis. 

Fact: The length of a particular job has no connection with whether the employee is a contractor or not. Both can be used for; casual, temp roles, on call, seasonal, busy periods, specific jobs and project work. To determine the status of the worker you again must look at the entire working arrangement and specific terms under which the work is being done.

 The 80% Rule (80/20 rule)

Myth: A worker is not allowed to work more than 80% of his time for one business to remain a contractor.

 Fact: The 80% rule relates only to personal services income (PS) and how a contractor reports their income on their tax return and can determine business deductions. This has no relevance to whether they are considered a contractor or not.

 Previous Use of Contractors

Myth:  My business has always used contractors, so all future workers must be contractors.

 Fact: Whenever a new worker is hired, the specific arrangement needs to be examined closely to decide the status of that particular worker. If the arrangement (including the terms and conditions under which the work is being performed) is not exactly the same as before, it could change the status of the worker.

A business may have also incorrectly determined the status of a worker in the past. Continuing to rely on simply the past may turn out to be an error and could cause negative implications for the future.

Registered Business Name

Myth: If a worker has a registered business name they should always be considered a contractor.

Fact: Having a business name has no relevance for the status of an employee or contractor.

 Contracting on Different Jobs

Myth: If a worker is a contractor on one job, they are a contactor on every job.

Fact: Just because a worker is a contractor on one job, does not mean they will be classified as a contractor on every job. The working arrangement and specific terms will decide the status of the worker. A worker can be considered a contractor on one job and an employee on the next job. They also could be doing two jobs at the same time, one as an employee and one as a contractor.

 Paying Super

Myth: My business should not take on employee and only use contractors so we are not required to pay superannuation benefits.

Fact: A business cannot decide to treat a worker as a contractor when they should be an employee just to avoid paying benefits like super. Businesses may be required to pay super contributions for their contractors. If you hire a contractor and pay them under a contract which is wholly or principally for the labour of the person, you will be required to pay super.

 Specialist Skills & Qualifications

Myth: A worker that uses their special skills or qualification should be considered a contractor.

Fact: If a business hires a worker for their specialist skills it does not automatically qualify them as a contractor.  Anyone with specialist skills can be hired as a contractor or an employee. The skill level has no connection to whether they are a contractor or employee.

Worker Wants to be a Contractor

Myth: My worker wants to be considered a contractor, so my business should hire him as one.

Fact: Just because the worker has a preference to be a contractor, it does not make it legal to hire him as one. The matter of how the worker is categorised is not a choice of the worker, but depends entirely on the conditions of the work arrangement and terms and conditions. If you do treat an employee as a contractor then you can face penalties, interest and charges for not meeting your tax and super obligations.

 Using Invoices

Myth: If a worker submits an invoice then they are a contractor.

Fact: Submitting an invoice for work completed does not determine the status of the worker. If the worker is deemed an employee, making payment toward an invoice for work completed does not change that employee to a contractor.

Contract

Myth: If a worker’s contract has a specific mention that they are a contractor, then they should always be considered a contractor.

Fact: If the work being performed is legally under the terms of an employee, the wording in the contract does not affect the status.  Business and workers may refer to being contracted to certain work, however this does not make them a contractor. If a worker is legally an employee, a contract specifying them as a contractor will not override the employment relationship.

 As you can see determining the status of employees and contractors can be complicated and should not be taken lightly. The working arrangement and specific terms and conditions to which the work is being performed will determine the status of the worker.  If you have any questions about your tax obligations in regards to employees or contractors please contact this office.

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Disclaimer:

Hillyer Riches Management Pty Ltd is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.

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