Employee or independent contractor?
This information is to help payers in the building and construction industry determine if the individual they are paying is an employee or independent contractor for income tax purposes. This information is a guide to the law only.
In the building and construction industry, individual workers are either employees or contractors.
It is important to determine the status of workers as you (the payer) have different tax obligations depending on whether you engage a worker as an employee or an independent contractor.
Employers who do not comply with their obligations in respect of their workers may be subject to penalties or prosecution in appropriate cases.
Employee or independent contractor?
Determining a worker’s status depends upon the terms and conditions under which the work is performed.
Does the worker have an ABN?
If a worker has an Australian business number (ABN) this does not automatically mean the worker is a contractor. You still need to consider the nature of your agreement with the worker.
Factors to consider
A key factor in deciding if a worker is an employee is the degree of control that can be exercised over the worker. If you have the right to direct how, when, where and who is to perform the work, the worker is likely to be an employee. These directions may be oral or in writing, or simply understood between the parties.
Other key factors are whether:
the worker is being paid for the time worked by them personally, or
whether the worker is being paid to achieve a result where they are able to subcontract or engage employees to perform the work.
No one factor is necessarily conclusive. It depends on the facts in each case.
Employee
An employment relationship exists if some or all of the following factors are present:
the payer controls the way in which the worker performs his/her duties
the worker performs the duties of their position and cannot delegate or contract out their work
the worker is recognised as a part of the payer’s organisation
the worker is not responsible for providing the materials or equipment required to do the job
the worker is paid for the time worked, rather than on the completion of a specific task
the worker takes no commercial risks and cannot make a profit or loss from the work performed
the worker receives paid leave (for example, sick, annual or recreation, or long service leave), or
work hours are set by an agreement or award.
None of these factors alone is indicative of an employment relationship. The totality of the relationship between the parties and a consideration of all the factors is required.
If a worker is an employee, you must withhold an amount from any salary, wages, commissions, bonuses or allowances you pay to the employee and send the amounts withheld to the Tax Office. An employer may also have obligations under fringe benefits tax and the superannuation guarantee laws.
Apprentices are considered employees for taxation purposes.
Independent contractor
An independent contractor agrees to achieve a specified result for an agreed price. In most cases an independent contractor:
is paid for results achieved
provides all or most of the necessary materials and equipment to complete the work
is free to subcontract the work to other entities
has freedom in the way the work is done subject to the specific terms of the contract
bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work
provides services to the general public and other businesses as well as the payer.
is free to accept or refuse work, and
is in a position to make a profit or loss.
If a worker is an independent contractor, you are required to withhold an amount from payments to them only where the contractor:
has entered into a voluntary agreement
provides their work or services for a client of yours under a labour hire arrangement, or
has not quoted their ABN to you.
Superannuation guarantee laws may apply to payments for work or services by an independent contractor in some cases.
Most independent contractors provide for their tax obligations through the PAYG instalments system. Contractors should also consider whether they need to apply for an ABN and register for goods and services tax (GST). Contractors who come under the contractor tax rules must include their personal services income in their individual tax return and cannot claim some tax deductions. Those operating through a company, partnership or trust may also have PAYG withholding obligations.
Factors to consider
Employee
Contractor
Control over work
The employer has an implied right in industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit.
A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their discretion.
Independence
An employee works in the business of the payer. Their work is an integral part of the business.
Although the work of a contractor is done for the business, it is not integrated into it but is ancillary to it.
Payment
Payment is often based on the period of time worked, but an employee can also work on ‘piece rates’ or commission.
Payment is dependent on the performance of the contracted services.
Commercial risks
An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee.
A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy any defective work at their own expense.
Ability to delegate
An employee performs the work personally and generally cannot subcontract the work to someone else.
Unless otherwise specified in the contract, a contractor can subcontract or delegate the work.
Tools and equipment
The employer, except when specifically agreed otherwise, usually provides tools and equipment.
Generally, a contractor provides their own tools and equipment.
What happens if an employer fails to comply with their PAYGW tax obligations?
Employers who do not comply with their PAYGW tax obligations may be subject to:
penalties up to 100% of what should have been withheld
prosecution in appropriate cases.
More information
If you have any questions, need more information or wish to obtain copies of the publications listed below please:
phone 13 28 66, or
visit our website at www.ato.gov.au
Source:
http://www.ato.gov.au/businesses/content.asp?doc=/content/61646.htm
Independent COntractors - Go to Work…Forget the Paperwork. Do it the EASY way, Contractor Compliance Business Management System www.contractorcompliance.com.au or call 1300 795 055