If you’ve moved into contracting or consultancy work, or you freelance alongside your day job, your tax, super and reporting obligations may differ from those of an employee. Understanding the legal and practical differences between being an independent contractor and an employee is crucial so you can meet your tax and other obligations and avoid unexpected consequences.
Responsibilities as an independent contractor
As an independent contractor, you generally have more responsibilities than an employee. You may need to:
- put money aside to cover tax payable on your contracting income;
- prepare and lodge your tax returns;
- lodge activity statements if required;
- charge, report and pay GST if you’re required to be registered;
- arrange your own business insurance, including personal income protection and workers compensation for any workers you employ;
- cover your own sick leave, annual leave and personal leave; and
- work out whether your income is personal services income (PSI).
Why changes to your work arrangements matter
A significant change in how your work’s performed can potentially have an impact on your classification as an independent contractor by inadvertently creating an employer–employee relationship and changing the nature of your tax and reporting responsibilities.
Businesses that incorrectly misclassify employees as independent contractors can face significant financial consequences. These may include penalties and interest for failing to meet PAYG withholding, payroll tax or super guarantee obligations. You may also be required to pay unpaid wages, leave entitlements and super, which can be substantial amounts.
Key factors to consider
Determining whether you’re a contractor or employee can be complex. It requires looking at the totality of your contractual relationship, including your written contract and, depending on the legal context, how your work is performed in practice.
Key factors may include:
- Control over work performance: Employees typically work under the direction and control of their employer, affecting how, when and where work is performed. Contractors generally have more control over their work methods, hours and location.
- Financial responsibility and risk: Employees carry no financial risk as this remains with their employer. Contractors bear the risk of making a profit or loss and are personally responsible for poor work or injuries.
- Tools and equipment provision: Employees are often provided with tools and equipment or receive allowances. Contractors typically supply their own, although this factor isn’t always determinative.
- Ability to delegate work: Employees must generally perform work themselves. Contractors often have the right to delegate or subcontract services to others.
- Work expectations and hours: Employees typically work standard or set hours. Contractors are usually engaged for specific tasks and may agree their own working hours.
- Integration into the business: Employees are typically presented as part of the business, while contractors maintain a more independent identity.
Get the right advice
If your work arrangements have changed significantly, you should:
- review the full contractual relationship;
- compare how the work’s actually performed versus what the contract says;
- talk to the business to ensure you both understand the terms and any consequences of a change in status; and
- ensure you’re meeting the correct tax, super and reporting obligations.
The interplay between Fair Work laws and your tax and super obligations can be complex. Contact our office to review your specific circumstances and ensure you continue to meet all your obligations correctly.
