A downloadable version of this guide is available
The Tax Office has released an online decision tool that is designed to help payers determine whether an individual worker is engaged as an employee or independent contractor. It will give a decision based on answers to some simple questions.
There is also a similar tool for Building and Construction Industry workers.
This guide provides information to help payers determine whether their workers (payees) are employees or independent contractors (for example, an individual, partnership, trust or company).
It is important to determine the status of workers as payers have different tax obligations under the pay as you go (PAYG) system depending on whether they engage a worker as an employee or an independent contractor.
The information is intended as a guide only. Please refer to Taxation Ruling TR 2000/14 for more detailed information.
There are a number of factors to consider in determining whether a worker is an employee or an independent contractor, with no one factor necessarily conclusive. A payer must examine all the facts in each case, including the terms of their contract with the worker showing the intent of both parties.
A key factor in deciding if a worker is an employee is the degree of control that can be exercised over the worker. If the payer has the right to direct how, when, where and who is to perform the work, the worker is likely to be an employee. These directions may be verbal or in writing, or simply understood between the parties.
Another key factor to consider is whether the worker is being paid for the time they work, or being paid for a result. Workers being paid by the hour are more likely to be employees. Workers being paid for a result are more likely to be independent contractors.
The main factors to consider in determining whether a worker is an employee or an independent contractor are outlined below and summarised in the table below.
Generally, a worker is an employee if they:
- are paid for time worked
- receive paid leave (for example, sick, annual or recreation, or long service leave)
- are not responsible for providing the materials or equipment required to do their job
- must perform the duties of their position
- agree to provide their personal services
- work hours set by an agreement or award
- are recognised as part and parcel of the payer’s business, and
- take no commercial risks and cannot make a profit or loss from the work performed.
If a worker is an employee, the payer must withhold an amount from any salary, wages, commissions, bonuses or allowances they pay to the employee. The payer determines the amount to withhold using the tax tables published by the Tax Office and information provided by the employee on a Tax file number declaration (and Withholding declaration if applicable).
An employer may also have obligations under fringe benefits tax and the superannuation guarantee laws. For more information about an employer’s fringe benefits tax obligations see Introduction to fringe benefits tax (FBT) (NAT 1744), or contact the Small Business Infoline on 13 28 66. For more information about superannuation guarantee obligations see Superannuation guarantee – How to meet your superannuation guarantee obligations (an employer’s guide) (NAT 1987), or contact the Superannuation Infoline on 13 10 20.
An independent contractor is an entity (such as an individual, partnership, trust or company) that agrees to produce a designated result for an agreed price. In most cases an independent 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, and
- is in a position to make a profit or loss.
If a worker is an independent contractor, a payer is required to withhold an amount from payments to them only where the contractor:
- has entered into a voluntary agreement with the payer to have amounts withheld
- provides their work or services for a client of the payer under a labour hire arrangement, or
- has not quoted their Australian business number (ABN) to the payer.
In some cases the superannuation guarantee laws may apply to payments for work or services by an independent contractor. For more information about superannuation guarantee obligations see Superannuation guarantee – How to meet your superannuation guarantee obligations (an employer’s guide) (NAT 1987), or contact the Superannuation Infoline on 13 10 20.
Most independent contractors provide for their tax obligations through the PAYG instalments system. Contractors should also consider whether they need to apply for an ABN and register for goods and services tax (GST). Contractors who come under the contractor tax rules must include their personal services income in their individual tax return and cannot claim some tax deductions. Those operating through a company, partnership or trust may also have PAYG withholding obligations.
For more information about these rules see Alienation of personal services income: Important information for contractors and consultants (NAT 4788), or phone 13 28 66. Use the information in the following table to help you determine if your workers are employees or contract workers. The factors listed are not exhaustive and you will have to consider all the terms of each contract.
Is your worker an employee or a contractor?
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Factors to consider
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Employee
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Contractor
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Control over work
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The employer has an implied right within industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit.
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A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their own discretion
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Independence
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An employee performs work for the employer in accordance with an employment contract.
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A contractor performs services as specified in a contract with the payer and provides additional services only by agreement.
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Payment
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Payment is often based on the period of time worked, but an employee can also work on ‘piece rates’ or commission
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Payment is dependent on the performance of the contract services
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Commercial risks
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An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee.
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A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy any defective work at their own expense.
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Ability to delegate
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An employee performs the work personally and generally cannot subcontract the work to someone else.
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Unless otherwise specified in the contract, a contractor can subcontract or delegate the work.
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Tools and equipment
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The employer, except when specifically agreed otherwise, usually provides tools and equipment.
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Generally, a contractor provides their own tools and equipment
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If you have any questions, need more information, or wish to obtain copies of the publications listed below please:
- phone 13 28 66, or
- visit our website at www.ato.gov.au
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Last Modified: Friday, 9 May 2008
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