If you run a business, you must know someone working for you whether an employee or a contractor. It is important to understand the difference between employees and contractors for businesses, especially when it is a matter of taxes. In Australia, the ATO has specific guidelines that determine the classification of workers. Let’s dive right in to know the differences between employees and contractors according to the ATO.
What are Employees?
Employees are individuals that usually work under a contract of service. They are hired to perform ongoing duties within a business and work as per the employer’s instructions and schedule. They have a high level of integration into the business and are liable to an employer’s control.
What are Contractors?
On the other hand, contractors are individuals engaged under a contract for service. Usually, they are hired for a particular task or project and they can independently perform their work. Contractors have control over the ways and hours worked, and they can engage others to help them complete the project.
As per the ATO, various factors determine whether a worker is an employee or a contractor. Basically, these factors include the level of control, independence, and extent of integration into the business. It is essential for businesses to classify workers accurately to comply with tax laws and avoid possible penalties to check the correct classification. Overall, understanding the difference between employees and contractors is vital for businesses to comply with ATO guidelines by classifying workers accurately. Businesses can meet their tax obligations and avoid possible legal and financial consequences.
Contractors Vs Employees
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S.No. |
Employees |
Contractors |
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1. |
Control: Your business has the right to control how, when and where the worker does their work. | Control: The contractor can decide how, when and where their work is done, liable to instructions in any contract or agreement. |
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2. |
An employee has no right to assign the work. They can’t pay someone to complete the work. | A contractor can sub-contract or assign work. |
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3. |
An employee gets paid for:
· the time worked · a commission · a cost per activity or item |
A contractor gets paid for a result achieved depending on the quote they gave. |
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4. |
The business gives all or most of the tools, equipment and other assets needed to complete the work. Or, the worker gives all or most of the tools, equipment and other assets needed to do the work, but the organisation supplies them with an allowance or refunds them for the cost of the tools, equipment and other assets. | Basically, the contractors are subject to supply their own tools, equipment and other assets to complete the work. |
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5. |
The worker bears little or no commercial risk as it is the business that bears the commercial risk for any expenses arising out of defects in their work. | A contractor bears commercial risks and is responsible for their work. They are subject to the cost of fixing any defect in their work.
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Common Myths and Facts about Employees or Contractors
- Myth: People who do short-term work are automatically considered contractors
Fact: It’s not a given that just because you hire someone for a few hours or days at a time that they are a contractor. Both staff and contractors are available for:
- temporary, casual, infrequent, and on-call work
- busy periods
- specific tasks, short jobs and projects
- Myth: If someone gives an invoice for their work are considered a contractor
Fact: A person is not necessarily a contractor just because they submit an invoice. Numerous aspects need to be taken into account.
- Myth: There is a written contract that says a person is a contractor, so they must be one
Fact: An agreement in writing will not change the fact that someone is an employee legally if:
- overrule the employment agreements or transform the employee into a contractor
- eliminate the tax and super responsibilities of an employer.
Conclusion
The blog clarifies the difference between contractors and employees along with common myths and facts about employees and contractors. For more details, you can contact Reliable Melbourne Accountants.