Employee vs Contractor: A Deeper Look

 Last time we discussed the differences between an employee or a contractor relationship, this week - why does it matter?

At it's simplest, the reason why this matters to you as a business owner is to ensure that you are complying with your obligations and are not surprised at a later date.  Even if you operate your business through a company, this is one of the areas where Director's can be held personally liable.

The main items that you need to be sure are treated correctly are Pay As You Go Withholding (PAYGW) and Superannuation Contributions (SGC).  If you engage a true contractor and they provide a valid ABN, then your business has no requirement to apply PAYGW or make SGC payments.

If the contractor does not provide a valid ABN then all payments are subject to PAYGW at 47%.

If the engagement is that of an employee then both PAYGW (at appropriate marginal rates for the employee) and SGC payments are required from the business.

The third category which can trip people up is when you contract with an individual for their employment services (for instance you pay an individual - not a trust or a company - an hourly or day rate in exchange for their services).  In this case, even if all other criteria of being a contractor are met and there is no requirement for PAYGW, then you may need to make SGC payments.

The consequences of getting the decision wrong (i.e. treating somebody as a contractor when they are really an employee) include penalties and charges such as: 

• PAYG withholding penalty – for failing to account for tax from worker payments (equal to the amount that should have been withheld or paid). 

• Company directors hold legal responsibility for ensuring their company fulfills its PAYG withholding obligations. If a company fails to meet its PAYG withholding obligations in full by the due date, the director automatically becomes personally liable for a penalty equivalent to the unpaid amount. 

• super guarantee charge, made up of 200% of super guarantee shortfall amounts plus the original amount – the amount of super contributions that should have been paid into a complying fund, interest charges of 10% per annum and an administration fee of $20 per employee, per quarter.

As you can see, it's an important area to understand and get right from the outset to avoid surprises or difficult conversations later.

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