Should you hire an employee or a contractor?

When everyone at your business or practice is overworked or you struggle to keep up with incoming work for some time, and you notice the consequent increase in customer complaints, maybe it’s time to increase the size of your workforce or outsource some of the work to a contractor.

Hiring contractors

You have a choice between hiring contractors and employees – both are legitimate as long as the conditions of the working contract match the worker’s classification.

It’s essential to understand the difference between employees and independent contractors because:
 it changes your obligations for paying and reporting tax, superannuation and other entitlements for your workers; and
 penalties and charges may apply if you incorrectly classify an employee as a contractor and fail to meet the relevant obligations or entitlements for that worker.

Although you generally don’t need to make super guarantee contributions for independent contractors, you may be required to make contributions for contractors where the contract engaging them is wholly or principally for their labour.

If they’re registered for GST, you will need to pay the appropriate GST to them for the services or work they provide to your business.

As noted above, it is vital to understand the difference between employees and independent contractors.
Last year the High Court handed down two crucial decisions on whether a worker is an employee or an independent contractor. The High Court placed particular importance on the terms of any valid written contract between the individual providing services and the entity using those services.

So, this may be an excellent time to check with your tax adviser whether individuals providing services to your business are genuine independent contractors or are, in fact, employees.

Employee for super guarantee purposes?

It is also necessary to know for super guarantee purposes whether an individual providing services to your business is an employee.
You pay super on behalf of an employee regardless of whether they:

• are full-time, part-time or casual-working holidaymakers are included;
• receive a super pension or annuity while still working; or
• are a company director.

There was a critical change last year (from 1 July 2022) – you now have to pay super for employees even though they are paid less than $450 monthly.
The rules for determining whether someone is an “employee” for super guarantee purposes are a bit different to the rules that are relevant for PAYG withholding purposes. Thus, the ATO has said that the draft ruling mentioned above will not be binding on them for super guarantee purposes.

Tip! The short article above only covers some of the factors to consider and there are others that may have a more significant impact on your business. If you wish to find out more, talk to us so we can help you can make the right decision for your business.