The difference between contractors and employees for payroll tax

Contractors and employees are defined differently for payroll tax purposes. If you are paying a contractor, certain exemptions and deductions may apply that will reduce the amount of tax you have to pay.

An independent contractor is an entity that agrees to produce a specific result for an agreed price. Contractors can include:

  • sub-contractors
  • consultants
  • sole traders
  • companies
  • partnerships
  • trusts.

In most cases a contractor:

  • is paid for results achieved
  • provides all or most of the necessary materials and equipment to complete the work
  • is free to delegate work to other entities
  • has freedom in the way the work is done
  • provides services to the general public and other businesses
  • is free to accept or refuse work
  • is in a position to make a profit or loss.

Payments made for contractor services in a financial year may be taxable if the arrangement you have with the contractor is considered a relevant contract for payroll tax purposes.

You can watch this video for an introduction to contractors for payroll tax.


Transcript of video

Employees

It's important to understand the difference between 'employees' and 'contractors'. They are treated differently for payroll tax purposes, so you need to determine which definition applies to the person working for you.

Even if you contract someone to work for you and the contract defines them as an 'independent contractor', they may still be your employee.

Factors to consider

There are a number of factors to consider when determining if someone is your employee. These include:

  • the right, authority or degree of control that the business operator can exercise over the worker
  • how the contract describes the nature of the relationship compared to the actual relationship between the parties to the contract
  • whether the focus is on the ultimate result or on what must be provided (e.g. labour)
  • whether the worker is conducting their own business
  • the capacity of the worker to pay others to undertake the services that the worker was engaged to provide
  • whether the worker bears the commercial risk and responsibility
  • whether the worker provides assets, tools and equipment or incurs overhead expenses
  • indicators that suggest an employer-employee relationship, such as
    • the right to suspend or dismiss the worker
    • the obligation to work
    • working set and regular hours
    • the payment of a regular or fixed remuneration
    • the deduction of income tax
    • providing superannuation benefits, annual leave, sick leave and long service leave
    • requiring the worker to wear a company uniform.

You must consider the total relationship - and not just the factors listed above - before determining whether a worker is an employee or an independent contractor.

Read the public ruling on determining whether a worker is an employee (PTA038) for more information.

Other relationships

You may have to pay payroll tax even if:

  • a worker is not a common law employee
  • or
  • a principal makes payments to an interposed entity (e.g. a company).

This is because wages also include amounts paid or payable to contractors under the contractor provisions.

For more information about amounts taken to be wages for deemed employees, refer to Division 1A and 1B of the Payroll Tax Act 1971.

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