A common question for businesses needing some work done is: should we employ a new person, or simply contract the workout? The answer isn’t a straight ‘yes’ or ‘no’, as it depends heavily on your business, the work to be done, and the person who might be doing the work.

What’s the difference?

Put very simply: an employee is considered part of your business, and you have responsibility for them and their work; a contractor is independent of your business and they have primary responsibility for themselves and their work. However, there are far more specifics that you need to be aware of – have a look at the ATO’s explanation of employees vs contractors.

Do restrictions apply?

It’s illegal to treat employees as contractors. This is why it’s important to get advice from a professional in the field, because they’ll be able to assess your situation and the exact parameters of your proposed relationship to the worker, and tell you whether you need to either change those parameters or employ the person directly.

What are the payroll implications?

There are a few basic differences between paying a contractor and paying an employee:

Employee Contractor
Income tax You take out PAYG income tax and pay the withheld amount to the ATO You pay the gross wages to the contractor, and they handle income tax payments themselves.
Superannuation You pay superannuation quarterly (or more frequently) for each employee. Typically the contractor handles their own superannuation payments, but don’t assume that this will be case: talk to a business advisor to check the specific circumstances.
Fringe benefits tax If you supply an employee with a fringe benefit (health insurance, a car, computer), then you will need to report and pay fringe benefits tax. No fringe benefits tax obligations.
Payroll tax Payroll tax will be payable per employee. Payroll tax might not be payable; talk to a business advisor to check your specific circumstances.


Which one is right for my business?

As a general rule of thumb, if you’re bringing in someone to work on a project; something that ends in a specific result – for example, painting the outside of a building – then you would hire a contractor. If you have a collection of tasks that regularly need to be completed – for example, reception and office administration – then you would hire an employee. But as we’ve stated before, it’s important that you get advice about your specific situation, and ensure that you won’t be violating legal requirements; and, of course, that you’re following the path that best suits your business.

Next up…

In our next blog post, we’ll revisit this contractors vs employees topic, and look at some of the advantages of hiring contractors over employees.

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