If you are a business owner, it is important for you and your business to stay compliant so that you can avoid large fines and other penalties. One area that commonly causes confusion for business owners is whether your worker is considered an employee or a contractor. This month we are taking you through the difference between the two classifications and the potential penalties you could face if you get it wrong.
What is a contractor?
A contractor is a person or business that enters into a contract with another person or business for work, typically at a fixed price.
Contractors are not employees of a business because they are not legally bound under an employment contract. A contractor is running their own business.
Independent Contractors - run their own business and generally work for a number of clients at the same time.
Subcontractors - an independent contractor who is hired by another independent contractor to help them complete their contracted work.
What is an employee?
An employee works in your business and is a part of your business. An employee usually works exclusively for your business and an employee can’t pay someone else to do their work.
What happens if I get it wrong?
Possible penalties for incorrectly classifying a worker as a contractor are:
PAYG not withheld - ATO will calculate and impose a requirement to pay the missing PAYG withheld on the employer together with interest.
Workers Compensation not paid - Revised premium will be calculated and possible penalties of the full amount of the premium plus interest.
SGC not paid - No tax deduction for the required contribution, plus interest and penalties.
Payroll Tax - Interest and premium interest and possible penalties up to 90%.
FairWork penalties - If a worker is deemed to be an employee backdated entitlements such as annual leave may be payable.
The cost of incorrectly classifying your workers is very high, so you should take care when deciding if someone is a contractor or an employee.
Remember - just because the worker has an ABN and has provided you with an invoice, does not necessarily mean they are considered a contractor.
ATO Decision Tool
The ATO has a useful tool to help you decide if the worker is an employee or a contractor. You can find it here.