Anyone signed on for a job as a contractor needs to know what that means from a tax point of view, or what difference being self-employed will make for meeting your tax obligations.
The status of your engagement is an important distinction – whether you are being put on as an employee or as an independent contractor – and can have consequences for both yourself and your new boss.
What is contracting? Contractors or consultants are self-employed people engaged for a specific task, at an agreed price, with a specific goal in mind, and often for a pre-determined timeframe. They set their own hours of work and take care of their own tax obligations. They aren’t paid a salary or hourly rate, and because they are not an employee a contractor’s position is more easily terminated than a ‘permanent’ employee.
Why do businesses like contractors? The benefit for businesses is that when extra work comes in then contractors can be used to meet this demand. It is a way to cover a temporary shortfall in staff, and done properly can offer helpful temporary work to people who need it.
Contractor or employee?
The main differences are that a contractor provides tools and equipment for the job, is paid for results not for time, is free to accept or decline work, and can make a profit or a loss. Also a contractor can delegate duties (or ‘sub-contract’).
If you are engaged just for your labour, you will be considered an employee rather than contractor from a tax point of view. In sales, for example, even a salesperson working for commission and therefore not receiving a fixed remuneration, will usually be deemed to be an employee.
Many an employer has been caught out when they find that the workers they hired as short-term contractors are in fact deemed to be employees – who expect (and are entitled to) all the usual obligations including to be superannuated by the current compulsory 9%.
HERE ARE THE 5 TIPS:
- Have a written agreement in place detailing the scope of the work to be undertaken so it can be determined at that point what the remuneration will entail including super.
- Enure you have your tax obligations sorted – ABN , GST for example
- Get advice about how you will record/invoice your earnings and what tax deductions you will be able to claim against this work and whether you need to lodge a GST Return.
- Find out what type of insurances you need to be a contractor
- Make sure you understand your tax position and know about the Personal Services Income tax rules and how you will pay tax on your earnings – you do not want a nice big tax bill as a surprise.
Tracey sharah is a CPA and tax agent with over 22 years experience working with businesses. Tracey has been running her own CPA Accounting practice in North Sydney METRO ACCOUNTING for 11 years. Over the years Tracey and her team at METRO have assisted her small business clients with strategies, tools and advice to assist them to be successful. These include business structuring, tax strategies, accounting system advice, integrating bookeeping services and SMSF set up and administration services. Tracey prides herself in being proactive and always available to her clients . www.metroaccounting.com.au