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Employee vs contractor - How to get it right video transcript
What's the difference between an employee and a contractor?
Well a contractor is someone who runs their own business and provides services to your business. An employee on the other hand works in and is part of your business. Some people believe that a worker is a contractor just because:
- they have an ABN
- you only need them for a short period of time or to help out during busy periods
- they have a written contract that says they’re a contractor
- you need a worker with specialist skills or knowledge.
None of these things will make the worker a contractor if they really are an employee.
So what does make a person a contractor?
Well there’s no one single thing - the whole relationship needs to be considered. For example, contractors can often delegate the work – this means they pay someone else to do the work instead of them. Employees have to do the work themselves. Sometimes an employee can swap shifts or organise a substitute in their place, but this is not the same as being able to delegate the work. Your business still pays the substitute.
A contractor is running their own business and takes commercial risks. They’re part of the business tax system and need to keep proper business records. Contractors are often contracted to achieve a specific result.
To install a new computer system or upgrade software. They may charge by the hour, but the business paying them wants the results achieved not just a certain number of hours worked. An employee will be paid for the time worked, regardless of whether a specific result is achieved.
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How does the ATO's decision tool work?
You can use the decision tool on the ATO website to assist in determining whether workers are employees or contractors for tax and super purposes. The tool asks a number of questions and when completed tells you if the worker is an employee or a contractor, and gives information about any tax and super obligations.
Are there penalties if you get it wrong?
If you use the ATO’s tool and provide accurate responses to the questions, the ATO won’t charge any penalties that might otherwise apply. If you don’t use the tool and are found to wrongly be treating your workers as contractors, it could end up costing your business a lot in penalties for not withholding tax, and paying super and other employee entitlements. So we recommend that you use the employee or contractor decision tool. It’s there to help you and remember to keep a copy of the decision for your records.
This video explains factors you need to consider to work out whether a worker is an employee or a contractor.