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Self-employed or employee – what is the tax difference?

What are the tax differences between being an employee and self-employed?

Employee versus self employed, what is the tax payable?

The difference at tax time is significant – for both you and your employer.

It’s important to know the differences before signing that contract.

What are the differences?

Employees are paid on a time-on basis including annual leave and sick leave entitlements.

They are supplied with what is needed to do the job. Employees won’t make a profit or loss from particular projects.

The duties and work hours of employees are set out in an agreement.

A Contractor is paid for the results achieved and can make a profit or loss.

Contractors are free to accept or decline work and can delegate tasks and duties to others i.e. subcontractors.

It is the responsibility of the contractor to come up with the equipment and tools they need to carry out their job.

According to the ATO, facts that provide evidence of the degree of control and independence fall into three categories;

  • Behavioural – does the company control or have the right to control what the worker does and how the worker does their job?
  • Financial – are the business aspects of the worker’s job controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
  • Type of Relationship – are there written contracts or employee type benefits i.e. pension plan, insurance, vacation pay, etc? Will the relationship continue and is the work performed a key aspect of the business?

What are the tax obligations for employees and the self-employed?

Employers need to withhold income tax from the salary and withhold and pay Social Security and Medicare taxes. Employers must also pay unemployment tax on wages paid to an employee and pay superannuation and possibly fringe benefits tax.

It is an illegal act, prohibited by the Fair Work Act to convert staff to contractors.

Employers who do so will face penalties for avoiding workers compensation laws as well as prosecution for tax evasion and flaunting compulsory superannuation law.

Contracting is becoming more common. It is a great way to manage spikes in business.

A contractor can move on when a project is finished. This not just helps the employer but also people searching for temporary or additional work.

If people are hired for their labour rather than for a specific project, they are considered as an employee, who is entitled to all the usual employment add-ons – from a tax point of view.

Having an ABN – Australian Business Number – doesn’t mean workers should be taken on as contractors.

Contractors are responsible for their own tax liabilities, thus the need for an ABN.

Contracts may need to register for GST – goods and services tax – if;

  • GST turnover is $75 000 or more ($150 000 or more for non-profit organisations)
  • taxi travel is provided as part of their business, regardless of GST turnover

GST turnover is gross business income excluding;

  • GST included in sales to customers
  • Sales that are not for payment and are not taxable supplies (some supplies to associates for instance)
  • Sales not connected with a business that the contractor carries on
  • Input taxed sales they make (such as financial sales or supplies of residential premises by way of rent or sale)
  • Sales not connected with Australia

Another item to pay attention to is whether to include PSIpersonal services income – in tax returns.

Confused? CVW Accounting have you covered. Call our office and our team will help you out – whether you ARE the employee or contractor or planning to take on staff as contractors.

 

This blog was first written and published in April 2012 then updated in November 2018 and August 2021.

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