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Employee v’s Subcontractor – What is the difference?

Bookkeeping Contractor vs Employee

It is important to ensure that you know the difference between an employee and subcontractor before hiring a worker for your business. If you wrongly treat your employees as contractors you will risk having to pay penalties and charges.

Each case needs to be considered on its own, however to be clear the difference between an employee and a subcontractor is outlined by the following factors.

These factors should be considered in determining whether an individual worker is a common law employee or an independent contractor for SGC and PAYG purposes.

  1. Integration

  • An employee works in your business

  • A contractor carries on a business on in his own right

  1. Delegation

  • An employee cannot delegate his duties to others except for delegating to other employees

  • A contractor has unlimited power of delegation and can delegate to other employees or subcontractors

  1. Level of control

  • The employer has a right to direct the employees what to do and what not to do, and also how and when it is to be done.

  • The contractors maintain a high level of discretion and flexibility as to how the work is to be performed.

  1. Risk

  • The employer, not the employee, bears all the commercial risk including poor workmanship or injury sustained in the performance of work

  • The contractor, not the employer, bears all the commercial risk including poor workmanship or injury sustained in the performance of work

  1. Assets and expenses

  • The employee generally performs the work on the employer’s premises and usingequipmentsprovided by the employer

  • The contractor provides his own equipment and incurs his own expenses to complete the work

  1. Results

  • The employee is generally paid an hourly rate or award rates

  • The contractor is contracted to produce a given result and paid uponperformanceof the contract.

If the employees are mistakenly treated as contractors by the employer the financial implications can be devastating. The business will be required to pay 9% superannuation guarantee contributions on top of the contracting fees it has already paid. All the future contracting payments will be subject to PAYG withholding tax. The business is required to remit the withholding tax to the ATO and prepare PAYG payment summaries for payments made to the workers.

Check out this great video produced by the ATO dispelling the myths about Employee’s and subcontractors


This information is not to be relied upon without speaking to your accountant, tax agent or financial adviser depending on the advice.

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