There's not one deciding factor that makes someone an employee or contractor for tax and superannuation purposes. As an employer, it's a decision that can be made only when the entire working arrangement has been reviewed.
It's important to assess this correctly because getting it wrong will put your business at risk of penalties and charges (refer below).
Where your business hires a Pty Ltd company, this will usually constitute a contractor arrangement, unless the arrangement is to be a sham.
Before hiring a contractor, the following factors needs to be considered:
- ability to subcontract or delegate – if they pay someone else to do the work.
- basis of payment – if they will be paid based on an agreed quote they provided.
- equipment, tools and other assets – if they are providing their own tools and equipment needed to get the job done.
- commercial risks – if they are legally responsible for their work and liable for fixing mistakes or defects.
- control over the work – if they decide how the work gets done subject to specific terms in any contract or agreement.
- independence – if they operate their own business independently of your business.
If the answer is no to some or all of these factors, you need to obtain advice before treating the person as a contractor.
Penalties and charges
Businesses risk significant penalties and charges if they incorectly treat a person as a contarctor including:
- PAYG withholding penalty – for failing to deduct tax from worker payments and remitting it to the ATO.
- super guarantee charge made up of:
- super guarantee shortfall amounts – the amount of super contributions that should have been paid into a complying fund.
- interest charges.
- an administration fee.
- additional super guarantee charge of up to 200%.
The above payments are not tax deductible.
