Do You Have Too Close a Relationship with Your Contractors?

Blog

Whenever a business owner relies on both employees and independent contractors to help them run their operation, they need to be particularly careful. Otherwise, they may run into trouble with the tax authorities and other organisations, which could end up being very costly. If you're in this situation but haven't paid too much attention to categorisation and the difference between these types of work, what should you know?

Employee Responsibilities

Whenever a business takes on an employee, they assume many responsibilities. They need to look at superannuation, extend workers' compensation insurance and withhold income tax at source (PAYG). They may also have to pay additional costs to the ATO and others.

Benefits of the Contractor Relationship

Generally speaking, the company will not have to take on any of these burdens when they engage a contractor to perform certain tasks. In this case, they will just tell the contractor what they need and will pay them a quoted price. The contractor will then be responsible for their own taxes, insurance or super.

Differentiation

While the difference may seem to be clear-cut, the tax authority looks very carefully at any contractual relationship. After all, they want to ensure that they are always getting the full amount of taxes according to the rules and regulations. The government will also want to be sure that any workers are adequately covered against the risk of accidental injury and that they get the right amount of leave if they are entitled to it.

Perceived Savings

In the past, some business owners would specifically take on contractors rather than deal with the burden associated with employees. These contractors would be defacto employees because they would effectively be working for the company full time and not be seeking any other business of their own volition.

How to Differentiate

Always be careful when you take on a contractor and ask yourself certain questions.

• Do you mainly control how the work is performed, or do you issue general instructions and allow the contractor to do the work as they see fit?
• Do you have an ongoing relationship with a contractor from one task to another, without the need for a new contract?
• Is the contractor paid on the basis of a completed job alone?
• Does the contractor have their own liability insurance?
• Do you provide any equipment or tools, or is the contractor expected to supply everything themselves? Don't run the risk and have too close a relationship with a contractor. If the tax authority determines that they are actually an employee, you may be responsible for back taxes that could amount to a great deal of money.

Expert Advice

If you are unsure, talk everything through in detail with a local tax accountant. They'll be familiar with the ATO tests and can advise you accordingly.

21 March 2022