Despite legislation to try and stamp out the practice of employees becoming contractors, there is an ever increasing number of people being hired on a contractual basis.
Beware! A common misconception of employers is to think that by hiring individuals as contractors, the employer will no longer be responsible for employee tax obligations such as PAYG withholding, superannuation, WorkCover and payroll tax.
There are many recent cases in which businesses have been found to have failed to meet tax withdrawing and superannuation obligations as an employer of an individual that was a contractor. It is very important to understand the definition of an employee. Confusing employees with contractors is not a defence the ATO will accept.
It is commonly believed that contractors who provide services through their own company or trust structure are responsible for meeting their own employer payment obligations. However, there are many other situations where SMEs get caught out for not meeting these obligations when a contractor is deemed as being an employee.
With the ATO applying more resources to ensure compliance in this area, it is important for employers to understand when a contractor is deemed to be an employee and what the payment obligations are in relation to them. The ATO requires that employers withhold PAYG from payments made to employees, company directors, office holders, independent contractors you have a voluntary agreement with and individuals under labour hire arrangements.
So what makes a contractor different from an employee? Contractors usually:
- retain the right to control how they perform their services
- are contracted to provide a specific result rather than fulfil an ongoing role with the company
- are paid upon the successful completion of the assignment
- provide their own equipment and tools and;
- are responsible for carrying commercial risk associated with completing the assignment.
If you hire your contractors under a contract that is principally for labour, you have to pay super for them – even if the contractor quotes an Australian Business Number (ABN). These contractors are considered your employees for super guarantee purposes.
Further for employers who pay wages in excess of $638,000, payroll tax may be payable on contracted services unless one of six exemptions applies:
1. The contractor provides services to the SME for no more than 90 days in a financial year.
2. The contractor engages others to perform all, or part, of the work pursuant to the contract with the SME and the contractor carries the risk for that work.
3. Services provided under the contract are not ordinarily required by the SME and the contracting company normally provides those services to the public.
4. The services under contract are ad-hoc services required by the SME for less than 180 days in a financial year.
5. The provision of materials or equipment is the main object of the contract and the provision of labour is secondary to the supply of this materials or equipment.
6. The Commissioner of Taxation also has the discretion to exclude certain payments from payroll tax if none of the other 5 exemptions apply.
In addition, WorkCover insurance coverage must also be provided for contractors deemed to be employees and you pay, or expect to pay, more than $7,500 a year in rateable remuneration. Payments to a contractor will be subject to WorkCover if they are deemed to be working under a contract of service and the tests to determine this are similar to those above.
It is clear that the correct treatment of both employees and contractors is vital to ensure you meet your obligations as an employer. The ATO provides some tools and calculators to help determine whether you are dealing with an employee or a contractor - see here. Penalties imposed by the ATO can be up to $33,000 for not meeting their employer obligations.
Please contact our office on 02 9299 7044 if you have any doubts about your employee/contractor arrangements and we will ensure that the appropriate course of action is taken.