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Small business accountant in Sydney tells you what is the difference between an employee and a contractorIn our modern mobile economy an increasing number of individuals are seeking the freedom of working for themselves and hiring out their skillset as contractors. This presents a conundrum for the employer or small business owner. We often get asked “What’s the difference between an employee and a contractor and why does it matter?” Employee or Contractor? What’s the difference? Note that where a subcontractor has their own private company with an ACN and ABN, they are safely treated as a subcontractor and you need not worry any further as they are treated as a separate business. However, the criteria for deciding whether payments to individuals are in the nature of an employer/employee relationship or a contractor/subcontractor relationship can be broken down into six key criteria that all need to be considered before making a decision.
Employee or Contractor? Why does it matter? The consequences in terms of potential fines and penalties can be significant enough to send a small business to the wall. If you treat an individual as a contractor and they are later deemed to be an employee by the ATO or a state-based body then the following consequences can be expected:
As you can see the consequences of getting this wrong can be quite disastrous, so it pays to err on the cautious side. Even if an individual comes to you with an ABN and wants to be paid as a subcontractor and you agree to it, you as the business director/owner will be the one held liable for engaging their services incorrectly. In such cases, you must either say no or take them on properly as an employee, even if it is just on a temporary or casual basis. With our modern open economy, this issue is becoming more and more predominant. As a consequence you can appreciate that the ATO are cracking down on such practices with increasing focus on industries where it is prevalent, such as the construction and IT sectors. Your options are either to employee them correctly, use a labour-hire firm and let them take the responsibility or only use sub-contractors that have their own genuine businesses, preferably operating as private companies. Whenever you engage an individual to perform work either for or on your business always consider the six key criteria and make a decision based purely on those criteria, don’t ever let the wishes of the individual in question sway you into making a decision that could come back to bite your business long after the individual has been paid and moved on. |