Employee vs Contractor – Superannuation, PAYG Withholding, Payroll Tax & Work Cover

Increasingly many employers prefer to treat workers as contractors as it can enable them to cut costs in terms of workers compensation, payroll taxes and superannuation guarantee. They can also negotiate pay rates outside of normal wages and conditions, and do not withhold tax.

However, it is not sufficient to simply state that the parties agree that the relationship is one of independent contractor and principal. All the surrounding facts must be examined before a decision is made. To do this is to incur substantial economic risk and possible penalties as well. The decision tree is fairly complex so I will outline each of the areas affected.

 

SUPERANNUATION

If a contractor is paid wholly or primarily for labour then they will be entitled to superannuation guarantee contributions, currently 9.5% of ordinary earnings. This includes company directors, board members and contractors where more than half the contract is for labour – irrespective of whether an ABN is supplied or not.

 

PAYROLL TAX

employee contractor
All amounts paid an employee in return for their services are liable for payroll tax. Even if you define workers as contractors in the agreement that they sign, they may still be regarded as employees for payroll tax purposes. There are a number of tests to determine the status of an employee/contractor; these include but not limited to;

  • whether the work can be delegated
  • who bears the commercial and injury risk
  • whether the worker is paid per job or per hour
  • whether the worker works exclusively for you for extended times
  • who supplies the tools and equipment

There are some variations between states. For Queensland details are available at the Office of State Revenue website.

 

WORKCOVER

The employer/employee relationship is central to determining liability to pay WorkCover. The definition of who is a worker for WorkCover purposes is based on the common law definition of an employee. Unlike payroll tax, there is as yet no harmonisation of the law in this area.

In Queensland a worker must be an individual in order for the employer to have a WorkCover liability. I.e. where you engage a corporation, the people generic viagra australia working for that corporation will not be your workers. However, a partner in a partnership may be.

Even where they provide their own ABN and are responsible for their own tax, a person may be a worker. Additionally, a person who falls into any of the following categories will be a worker:

  • They fail the results test or do not have a Personal Services Business Determination from the Tax Office
  • Sharefarmers
  • Salesperson paid by commission
  • A person not regularly carrying on a trade or business, or who performs work outside their trade or business
  • A person hired from a labour-hire agency, group training organisation or holding company to work for the employer.

There are also eight specific exclusions which apply. Namely, a person will not be a worker if they are a:

  • Director of the employer
  • Trustee of the employer
  • Partner of the employer
  • Person who performs work under a contract of service with the Commonwealth or a Commonwealth authority
  • Professional sportsperson
  • Part of a bona fide share fishing agreement
  • Driving instructor
  • Participant in the Work for the Dole scheme.

 

PAYG WITHHOLDING

Once again it is important to determine if a worker is an employee or contractor.

If they are contractors, you will generally only withhold tax if they fail to quote their ABN, or if you  have entered into a PAYG voluntary agreement with them. On the other hand, if they are employees,  you will generally withhold tax from most payments that you make to them.

To correctly determine whether a worker is an employee or contractor, you need to look at the whole  working arrangement. A worker isn’t automatically a contractor just because they have an ABN or  specialist skills or you only need them during busy periods. The decision has many of the same  conditions mentioned above. For full details go the ATO website.

NOTE: The important take away from this article is that just calling a worker a “contractor” does not  automatically remove the liabilities and responsibilities of employing people in your business.

Acknowledgement to Australian Bookkeepers Network  and the ATO for much of the material in this article.