Tax Blogs

ABN Contractors | 2023 Gotax

June 26, 2023

Understanding the Difference: Employee vs. Contractor for Australian Income Tax

It seems to be quite a vexing question in the workplace, “Are you a contactor or an employee”.  The answer has implications for the tax deductibility of expenses, the payment of certain benefits for (ABN) employees and the overall accountability of the work and the responsibilities of the employer.

A point of clarity, the mere fact that you have been issued with an ABN does not make you a contractor.  Depending on the industry an ABN holder can be an employee by another name.

To help you make a determination, both contactors, employees and employers can use the following criteria as a guide.

Do you have the ability to Sub-contract or Delegate?

Contractor: A contractor has the freedom to engage others to perform the work on their behalf.

Employee: An employee cannot delegate or hire someone else to perform their work. They are responsible for completing the tasks assigned to them.

How do you get paid?

Contractor: Contractors are generally paid upon completion of their work based on an agreed quote.

Employee: Employees receive payments based on the time they work (hours or shifts), commission, or for each specific item or activity they perform.

Who supplies the equipment, tools, and materials and other things?

Contractor: Contractors usually bring their own tools, equipment, and assets required to complete the work.

Employee: Employees either receive tools and equipment from their employer or receive an allowance or reimbursement for the items they need.

Who takes on the work/job risk?

Contractor: Contractors are responsible for fixing any mistakes or errors at their own expense.

Employee: Employees are not personally liable for mistakes made during work; the employer assumes responsibility for fixing any errors.

Who really controls the work?

Contractor: Contractors have the freedom to decide how to perform the work as long as it meets the agreed standard or terms outlined in the contract.

Employee: Employees follow the instructions and reasonable work requests provided by their supervisors or employers.

Are you independence of the head contractor in performing the work?

Contractor: Contractors are perceived as separate entities from the business they work for and operate their own independent businesses.

Employee: Employees are considered part of the business and are not independent entities.

Understanding the difference between being an employee and working as a contractor is crucial for income tax purposes.  Having an idea of the criteria outlined above, individuals and employers can ensure they fulfill their tax, workcover and superannuation obligations with some level of confidence.

Sometimes there’s a fine line between the two, consult Gotax (or the ATO) to get clarity.

Contactors also need an affordable bookkeeping system that’s easy to use, understand and is affordable. 

Consider using eCashbooks.com.au.


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