Business Guide
Contractor vs Employee: Tax Obligations
Understand the key tax, super, and insurance differences between contractors and employees in Australia.
General Information Only. This guide is intended as general information and does not constitute financial, tax, or legal advice. Your individual or business circumstances may differ — please speak with our team before making decisions based on this content.
Key Differences at a Glance
- Employees receive a regular salary or wage and are on a payroll system
- Contractors are typically paid per project, invoice, or at an agreed contract rate
- Employees have tax withheld by their employer via PAYG Withholding
- Contractors are generally responsible for managing and paying their own tax
- Employees receive Superannuation Guarantee (SG) contributions from their employer
- Contractors may or may not be entitled to super depending on the arrangement
- Employees are usually covered by WorkCover; contractors typically arrange their own insurance
Tax Obligations for Contractors
- Register for an ABN if providing services on a regular basis
- Consider registering for GST if turnover exceeds or is expected to exceed $75,000
- Lodge a business activity statement (BAS) if registered for GST
- Pay PAYG instalments quarterly if required by the ATO
- Declare all contractor income in your individual or business tax return
- Keep detailed records of all income and deductions throughout the year
- Consider income protection insurance as you are not covered by an employer
The "Sham Contracting" Risk
- The ATO actively reviews arrangements where employees are incorrectly classified as contractors
- Factors such as control, hours, tools, and exclusivity are assessed to determine true working status
- Misclassification can result in back-payment of super, PAYG, and penalties
- Both the engaging business and the worker can face consequences
- If you are unsure of your classification, seeking professional advice is strongly recommended
Common Deductions for Contractors
- Business-related travel and vehicle expenses
- Tools, equipment, and software used for work
- Home office running expenses if working from home
- Professional indemnity and public liability insurance
- Marketing, website, and business development costs
- Accounting and bookkeeping fees
- Relevant training and professional development costs
Not sure which category applies to you?
Our business advisers can review your arrangement and help you get it right from the start. Contact us for personalised advice.
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