Your most common accounting questions — answered!

1st January, 2015

Contractors shaking hands

Are you self-employed and a contractor? You can still be classified as an employee.

Anyone signed on for a job as a contractor needs to know what that means from an accounting and tax point of view, or what difference being self-employed will make for meeting your accounting and tax obligations.

The status of your engagement is an important distinction — whether you are being put on as an employee or as an independent contractor — and can have consequences for both yourself and your new boss.

What is contracting? Contractors or consultants are self-employed people engaged for a specific task, at an agreed price, with a specific goal in mind, and often for a pre-determined time frame. They set their own hours of work and take care of their own accounting and tax obligations. They aren’t paid a salary or hourly rate, and because they are not an employee, a contractor’s position is more easily terminated than a ‘permanent’ employee.

Why do businesses like contractors? The benefit for businesses is that when extra work comes in, then contractors can be used to meet this demand. It is a way to cover a temporary shortfall in staff, and done properly, it can offer helpful temporary work to people who need it.

Contractor or employee?

The main differences are that a contractor provides tools and equipment for the job, is paid for results (not for time), is free to accept or decline work, and can make a profit or a loss. Also, a contractor can delegate duties (or ‘sub-contract’).

If you are engaged just for your labour, you will be considered an employee rather than contractor from a tax point of view. In sales, for example, even a salesperson working for commission and therefore not receiving a fixed remuneration, will usually be deemed to be an employee.

Many an employer has been caught out when they find that the workers they hired as short-term contractors are in fact deemed to be employees—who expect (and are entitled to) all the usual obligations, including to be superannuated by the current compulsory nine percent.

Here are five tips to avoid trouble:

  1. Have a written agreement in place detailing the scope of the work to be undertaken so it can be determined at that point what the remuneration will entail, including super.
  2. Ensure you have your entity structure, accounting system and tax obligations sorted — Company versus Sole Trader, and registration for ABN and GST, for example.
  3. Get advice about how you will record and invoice your earnings, what accounting system will suit your needs and what tax deductions you will be able to claim against this work and whether you need to lodge a GST Return. You will need to keep accurate, up-to-date accounting records so you can monitor your income position and tax liability.
  4. Find out what type of insurances you need to be a contractor.
  5. Make sure you understand your tax position and know about the Personal Services Income tax rules and how you will pay tax on your earnings  — you do not want a nice big tax bill as a surprise.

Seek advice from your accountant, and use the following as a guide: