Tax Implications of Hiring Employees vs. Independent Contractors

When you hire an employee

When you hire a contractor

• They work within your business under a contract of employment
• Have regular working hours
• Are paid a wage or salary
• Are entitled to any employee benefits programs you have in place
• Are entitled to annual and personal (sick) leave
• Are entitled to superannuation
• May work at your office or remotely (as set out in the employment contract)
• Employers have greater control over their employees’ workloads – i.e. they will carry out tasks under your direction and guidance, during hours set out by you

• They have their own business
• They may offer their services to multiple clients, including you (which means you will join the queue when needing work done)
• They have control over the hours they work, where they work and what their schedule looks like.
• Work will be invoiced (i.e. no fixed wage and benefits)

When you hire an employee

When you hire a contractor

• Employer will need to withhold PAYG (Pay As You Go) withholding tax from employees’ wages and remit it to the ATO on their behalf
• Employer is responsible for submitting regular payroll tax reports
• Employer is responsible for issuing payment summaries
• Employer will need to meet all ATO requirements
• Employers generally don’t need to withhold tax from contractor payments unless the contractor does not provide their ABN, in which case employers must withhold 47% of the payment.

• Contractors are responsible for managing their own tax obligations and paying their own income tax
• Contractors may need to make quarterly PAYG instalments if required by the ATO

When you hire an employee

When you hire a contractor

• Employers must pay superannuation at the Superannuation Guarantee rate (currently 11.5%)
  • For employees over 18 superannuation is paid on ordinary earnings
  • For employees under 18 superannuation is paid if they work more than 30 hours in a week

• The abovementioned contributions must be made to the employees nominated super fund at least quarterly.

• Contractors are generally responsible for their own super contributions

Note: If a contractor is engaged under a contract mainly for their labour, they could be classified as an employee for superannuation purposes, and the employer might need to make super contributions on their behalf. This can be a complex issue, so it’s recommended to seek clarification if you have any doubts.

When you hire an employee

When you hire a contractor

• Employers are required to provide paid leave entitlements in line with the National Employment Standards (NES) and their applicable award or enterprise agreement
• Employer must have workers’ compensation insurance to cover employees in case of injury or illness at work

• Contractors do not receive paid leave entitlements
• Contractors manage their own insurance cover, including income protection and public liability insurance

Note: If a contractor is misclassified as an independent contractor when they should be an employee, you may be liable for back pay of leave entitlements and other benefits, as well as fines.

You may also need to include contractor payments on your workers compensation insurance. Check with your provider as requirements can change for each State

When you hire an employee

When you hire a contractor

• Wages paid to employees are subject to payroll tax if total national wages (including superannuation) exceed the threshold for your business within the relevant state or territory that individuals are employed.
• Payroll tax is calculated based on the total wages you’ve paid for a month. If you surpass the threshold, you must register for payroll tax.

• Payments to independent contractors are generally not subject to payroll tax.
• Depending on where you live, payroll tax might be necessary for payments made to contractors who exclusively work for your company or under certain conditions.

When you hire an employee

When you hire a contractor

• FBT applies to employees if you provide them with fringe benefits
• Employers are responsible for calculating and paying FBT

• FBT generally does not apply to contractors, as they are not considered employees.
• Any non-monetary benefits offered to a contractor are usually regarded as part of their compensation package and will be subject to income tax by the contractor.