It is necessary for employers must know whether their workers are employees or contractors because the tax, superannuation and other government obligations change depending on the worker’s status:

  • If a worker is an employee, PAYG withholding will need to be withheld from wages. The employer must report and pay the withheld amounts to the ATO, pay superannuation at least quarterly for eligible employees, and report and pay FBT if fringe benefits are provided to employees.
  • In contrast, if a worker is a contractor, usually PAYG is not withheld from payments – unless they have not quoted their Australian Business Number (ABN) in which case PAYG withholding must be deducted at the top marginal tax rate. FBT is not payable if non-cash benefits are provided to a contractor.  However, depending on the labour services contract or arrangement, especially if the contract is principally for a contractor’s labour, superannuation guarantee contributions must be made to a complying superannuation fund.

Establishing whether a worker is an employee or contractor may be difficult.  The whole working arrangement should be examined to determine whether the worker merely works in the business (i.e. an employee) or whether the worker operates their business and performs work for the business (i.e. a contractor).

Incorrectly treating employees as contractors can subject businesses to PAYG withholding penalties and superannuation guarantee charges.

It is a complex area and it is not necessarily easy to work out.