Employee or Contractor?

As seen in Woopi News October 2023

Business owners are often faced with the question; should I employ someone or contract the work out. We’d all like to think this is a choice businesses are free to make but think again as the ATO is looking to tighten the rules for businesses who engage “subcontractors”.

So how do you determine if the person you are engaging should be treated as an employee, not a contractor? Consider if the person working in your business is a part of the team. Are they representing your business, driving your vehicles, or even wearing your uniform? Are they providing their knowledge or skills for an hourly or daily pay rate?

Generally, true contractors are independent, they set their own charge rates and availability, quote for the work, or charge a set rate for each job. They pay for their own materials, vehicles, and tools. They build their own brand/business name and engage with multiple unrelated customers.

So, why does the ATO care if we pay a subcontractor or put them on as an employee? If people use an ABN rather than a TFN, they are responsible for saving money and paying their taxes. If not managed properly this can become a financial problem if the ABN holder doesn’t know how much to save for tax or isn’t managing their cashflow. By tightening the rules and forcing subcontractors back onto payroll the ATO would be more likely to receive the PAYG tax on time as it would be deducted from the employees pay.

Now that Payroll data is shared with Services Australia, by moving subcontractors back onto the payroll there would be tighter rules on tax deductions, removing the ability to significantly reduce taxable income by writing off business assets and therefore obtaining benefits like Family Tax Benefits, increased Child Care Subsidy or reducing the Child Support liability in the following year.

If you are concerned about your contractor relationships moving forward, please have a discussion with your accountant or refer to the ATO website for more information.