When hiring a new worker, you must check if they will be an employee or contractor for tax purposes. It will affect your tax, super and other obligations and penalties may apply if you get it wrong.

There's no one deciding factor that makes a worker an employee or contractor for tax and super purposes. As an employer, it's a decision you can only make accurately when you review the whole working arrangement.
The table below outlines six of the factors that, taken together, determine whether a worker is an employee or contractor for tax and super purposes.

Employee

Contractor

Ability to subcontract/delegate: the worker can't subcontract/delegate the work – they can't pay someone else to do the work.

Ability to subcontract/delegate: the worker can subcontract/delegate the work – they can pay someone else to do the work.

Basis of payment: – the worker is paid either:

  • for the time worked
  • a price per item or activity
  • a commission.

Basis of payment: the worker is paid for a result achieved based on the quote they provided.

A quote can be calculated using hourly rates or price per item to work out the total cost of the work.

Equipment, tools and other assets:

  • your business provides all or most of the equipment, tools and other assets required to complete the work, or
  • the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.

Equipment, tools and other assets:

  • the worker provides all or most of the equipment, tools and other assets required to complete the work
  • the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.

Commercial risks: the worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work.

Commercial risks: the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.

Control over the work: your business has the right to direct the way in which the worker does their work.

Control over the work: the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement.

Independence: the worker is not operating independently of your business. They work within and are considered part of your business.

Independence: the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.

It's important to pay anyone who works for you correctly, and ensure that you're paying out the proper entitlements, or you could face some hefty bills.
For example:
Say you have a 'contractor' who's invoiced you $80,000 for the year, but the ATO, SRO or WorkCover review and determine that you should have been paying him as an employee all along.
The ATO then decides to take the $80,000 as his net salary - you then have to pay around $30,000 withholding tax to gross it up to $110,000. On top of this, you then have to pay 9.5% of his gross wage ($110k) in superannuation, coming to around $10,450. Also, since these payments were late, you may be facing penalties and interest from the ATO, and you won't be able to claim a tax deduction as the PAYG and super payments weren't made on time. Then there may be additional WorkCover insurance payments, and payroll tax if you're above the threshold.
But one of the biggest problems can be if he gets injured at work. Since you assumed he was a contractor, you're not covered for him under your worker's compensation insurance, so you could face large fines.
Employee and contractor contracts can be very important to have in place to show that your hire is really one or the other.

Head over to the ATO's website for their 'Employee or contractor decision tool' to help you figure it out, or contact us if you're concerned about your payroll - we're happy to help you sort it out.