Spot the contractor.

Contractor or employee? A guide for small businesses

With the Christmas period coming up, many small businesses will need to hire additional workers to keep up with the busy rush.

For those who need the extra help, it is important to know who counts as a contractor and who counts as an employee. They have different work methods with different legal responsibilities as well as different tax considerations. Here is a simple guide to whether that new hire should be considered an employee or a contractor, drawn from the Australian Taxation Office.


With SMEs employing over five million Australians according to the Australian Small to Medium Enterprise Alliance, knowing your obligations as an employer is integral to running a successful business.

An example of an employee would be a retail assistant who works nine to five every weekday. These workers are given a specific set of tasks by their manager/employer. They have their tools provided for them.

When it comes to tax, their income tax is deducted by their employer, either independently or by a tax accountant. Superannuation is paid into a nominated account by their employer.


While employees may be more common in many industries, there are still a significant number of contractors. Research conducted in 2013 by the Australian Bureau of Statistics numbered independent contractors at one million: 8.5 per cent of the total Australian workforce at the time.

An example of a contractor would be a welder hired to complete repairs on a metal sign. They take on a contract that pays them a certain figure, to be paid upon satisfactory work. Some of this amount may then be paid out to subcontractors that they have hired. A timeframe in which to complete the work is given, but they are not required to work set hours. All tools required for this work are to be paid for by the contractor.

When it comes to tax, contractors pay their own income tax and organise their own superannuation.

Be aware of these differences this Christmas period, as incorrectly treating one type of worker as the other can carry hefty fines from the Australian Taxation Office. The Fair Work Ombudsman reports these fines as being up to a maximum of $54,000.

Taxpayers Australia also states that there is no single factor that makes a worker a contractor or an employee, but rather a combination of factors. If you are unsure of your tax obligations with your employees, or require a business development consultant, contact Wilson Porter today for expert accounting advice.