Only employers can choose whether to hire an employee or engage an independent contractor for a while to work for them.
Depending on your decision of choice, it can either negatively or positively impact your business or company.
Misclassification can easily lead to significant financial and legal consequences for which you might not be ready.
Our article delves deeper into understanding the key distinctions and crucial considerations that will help you decide for your company. Let’s get right into it;
Understanding employees and independent contractors
Employees work within and are part of a company bound by a contract of employment in the workplace.
They are entitled to have various benefits such as paid leave and superannuation contributions with a set working hour.
The case differs for independent contractors because they run their businesses and can provide services to other companies.
As a contractor, you have all the time and freedom to work on your terms and be responsible for your taxes and superannuation obligations.
Differences between employees and independent contractors
Have you ever wondered what’s the difference between employees and contractors regarding PAYG and more? Well, here’s how;
1. Tax withholding obligations
- Employees
As an employee, you are required to withhold Pay As You Go (PAYG) tax from your wages.
The amount will be remitted to the ATO, ensuring the employee has appropriately met their income tax obligations.
- Independent contractors
Contractors are responsible for managing the tax liabilities that they may come across typically through the PAYG instalments system.
Independent contractors with an annual turnover exceeding $75,000 must register for and remit GST to the ATO.
2. Superannuation responsibilities
- Employees
Matters to do with superannuation involve employers contributing on behalf of their employees.
This mandatory contribution is a percentage of employees ordinary time earnings that must be paid for at least quarterly.
- Independent contractors
Typically, contractors are responsible for their superannuation. However, if they are engaged primarily for their labor, an employer must make a superannuation contribution on their behalf.
In this case, it will be similar to an employee, and it depends on your arrangement with them and the conditions of the working arrangements.
3. Fringe benefits tax implications
- Employees
When employees acquire noncash benefits from the company, such as cars or health insurance, their employers would be responsible for paying their FBT taxes.
- Independent contractors
Generally, independent contractors are not considered employees, therefor FBT tax doesn’t apply to them.
Any benefits provided are considered part of the contractor’s income and are taxed accordingly.
4. Payroll tax considerations
- Employees
Wages paid to employees are constantly subjected to payroll tax if it surpasses the threshold in their jurisdiction.
- Independent contractors
When contractors work for an employer, be it a company or business, depending on their state, their payments are constantly subjected to payroll tax.
Conclusion
With the above pointers, it’s easy for you, as an employer, to determine which option —hiring an employee or contractor—will work best for you.
With the evidence of a written contract that can be updated and reviewed at any time, it will be easy to clearly identify the nature of the work relationship and decide the way forward.
Consult professional experts, such as legal teams and tax accountants like kshtax, for tailored advice on meeting your business obligations and avoiding pitfalls.
