Congratulations! You’ve landed a great new gig with a company you really want to work with. But, they’ve asked you come on board as a contractor.
Here’s what you need to know before you accept their offer because there are some significant differences in how you’d be working.
First and foremost, will you be eligible to apply to the Tax Office for an Australian Business Number (ABN)? An ABN is only available to people who are carrying on an enterprise.
What that means is that you must be a genuine business. The questions you’ll be asked by the Tax Office include:
- Is the activity a significant commercial activity on a size and scale that is usual for the industry?
- Is there is an intention to make a profit? Generally you would have a business plan or a strategy which includes advertising the sale of products or services.
- Is the business is carried out in a systematic and organised way and appropriate business records maintained?
What then distinguishes an employee from a contractor?
There’s actually no simple answer, sorry and consideration must be given to all the facts of the relationship. Just because there may a contract in place which claims that there is no employee/employer relationship does not make it a contractor arrangement.
Factors to consider and questions to ask include:
- Are payments made principally for the person’s labour?
- Is the person paid for time worked (versus achieving a set result)?
- Is the person required to do the work themselves rather than subcontract or delegate?
- Does the employer/contracting organisation control the work to be performed?
- Does the employer/contracting organisation assume the risk of the work including rectifying any defects?
If the answer to most of these questions is ‘yes’, the person will be considered by the Tax Office to be an employee and not a contractor.
This means the company you’re working for should be meeting PAYG withholding obligations, superannuation commitments and also including you in their workers compensation insurance policy. Penalties can apply in cases where it is found that these obligations are not being paid.
If you are in doubt, a good first port of call is to use the Tax Office decision tool to make an assessment.
One of the arguments clients frequently tell me is that they fall under the 80/20 rule and therefore claim they can be classed a contractor. Their argument is that they have two or more clients and no one client contributes more than 80% of their income. They therefore perceive they’re running a business and can be regarded as a contractor.
Unfortunately, this isn’t a consideration in assessing whether or not the ATO believes them to be an employee. Importantly, you need to consider whether personal services income applies because remember you can have two jobs and be an employee for each. Personal services income is a whole other minefield that I will cover in a separate post!
Other arguments which also don’t come into the employee vs contractor determination include:
- Everyone in the industry does it. NO, just because someone else has done it, doesn’t mean they are right.
- My employee has an ABN and wants to be a contractor. NO, it isn’t a matter of choice.
- I’ve contracted to the same business in another role. NO, every new role must be considered on the circumstances.
- I have specialist skills that aren’t readily available. Again NO, it doesn’t matter, you must consider the facts and circumstances.
As you can see, it’s a very technical area and it’s important to have it sorted correctly – with implications for both employees and employers if you get it wrong.
I’m more than happy to chat with you to help you make the decision and offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your finances!