Are you a contractor or an employee?

Thursday, Feb 9, 2012

Do you have control over the way a task is performed and do you work standard hours? Do you submit tax invoices for payment and do you file GST returns?

In a time when 'sham contracting arrangements' are on the rise, according to Minister for Trade Craig Emerson, the answers to the questions above are a crucial indicator as to whether you are an employee or an independent contractor.

Under 'sham contracting arrangements', employers treat workers as independent contractors to avoid meeting employee entitlements such as leave entitlements, workers' compensation insurance, superannuation and so forth.

What is the difference between the two? If you are an employee, you are paid a salary. You receive leave entitlements such as sick leave, annual leave and long service leave. You're supplied with all the tools and equipment needed to perform your job, such as a computer for instance, and you are expected to perform certain duties as agreed during work hours set out in your contract. You are recognised as part of the business.

You take no commercial risks and cannot make a profit or loss from the work performed.

If you are a contractor, you are paid on the basis of results achieved. You supply your own tools and equipment for the job and you can delegate your duties to another person. You are free to accept or decline work as you please and you can make either a profit or a loss while employed as a contractor.

In other words, the working arrangements for an independent contractor are more flexible and unpredictable than that of an employee.

This table below will help you determine whether you are an independent contractor or an employee:

Criterion

Employee

Independent   contractor

Do you have control over the way a   task is performed?

No

Yes

Do you supply/maintain your own tools   or equipment?

No

 

 

Yes

 

Do you work standard hours?

Yes

No

Are you integrated into the   organisation?

Yes

No

Do you work at your employer's place   of business?

Yes

Yes/No

Are you paid on task completion rather   than receiving wages based on time worked?

No

Yes

Do you incur any loss or receive any   profit from the job?

No

Yes

Do you accept responsibility for any   defective or remedial work that was your own doing?

No

Yes

Are you free to work for others at the   same time?

No

Yes

Do you accept that work lasts for the   term of each particular task or contract?

No

Yes

Do you have the right to employ or   sub-contract any aspect of your work to another person?

No

Yes

Do you have the right to employ an   apprentice or trainee in the execution of contracts?

No

Yes

Do you understand the arrangement with   you as a contract for services?

No

Yes

Does your employer deduct tax from you   pay?

Yes

No

Do you provide your own public   liability and sickness and accident insurance cover?

No

Yes

Do you receive paid holidays or sick   leave?

Yes

No

Do you receive superannuation   entitlements?

Yes

No

Do you submit tax invoices for payment?

No

Yes

Do you file GST returns?

No

Yes, but you may not have to if you're   earning less than $75,000 per annum (exclusive of GST)

Are you paid at the end of each   contract or project?

No

Yes

Do you carry out work under a business   name, partnership or company structure?

No

Yes

There is no single criterion that can conclusively determine if you are an employee or an independent contractor, but rather a range of combined factors.

Why is it important to know which one you are? If you are an employee being incorrectly classified as an independent contractor, you are losing out. There is no withheld tax from your salary and there is no legal entitlement for leave, superannuation and workers' compensation insurance.

As a contractor, there are also a different set of tax obligations you will have to follow. More often than not, you will require an Australian business number (ABN) to avoid having tax deducted at the top marginal rate of 46.5% (including 1.5% Medicare levy) and may also need to register for goods and services tax (GST).

You have to register for GST if your GST turnover is at, or above the GST turnover threshold of $75,000 (exclusive of GST) and $150,000 (exclusive of GST) or more for non-profit organisations. Your GST turnover is your gross business income excluding:     

  • GST included in sales to your customers
  • Sales that are not for payment and are not taxable supplies (some supplies to associates for instance)
  • Sales not connected with a business that you carry on
  • Input taxed sales you make (such as financial sales or supplies of residential premises by way of rent or sale)
  • Sales not connected with Australia.

Come the end of every financial year, contractors have to take care of their own tax liabilities unlike their employee peers whose taxes are withheld under the PAYG withholding system.

Contact our office on (08) 8384 4400 for any assistance.