There are many benefits to working as a contractor. For starters, you are able to run your own business which provides you with the flexibility to negotiate your fees and working arrangements. As a result, contractors manage their own funds and are required to pay their own tax. In this article, we’ll explain what your tax obligations are as a contractor and how to ensure you comply.
Key points
- Contractors and employees are afforded different rights and responsibilities
- A contractor runs their own business whereas an employee works for your business
- Contractors are responsible for managing their own funds and lodging their statements to the Australian Taxation Office (ATO).
Contractor or employee?
Firstly, it is important to know the difference between a contractor and an employee. This is due to the fact that contractors have distinct rights and obligations to employees. While all the terms and conditions of the working arrangement should be considered, the following list will provide a general overview to help decide if you are a contractor or an employee.
Contractor
- Able to subcontract and/or delegate the work
- Calculates own pay
- Supplies all or most of the equipment required to complete the work
- Legally responsible for own work and costs for any defects to the work
- Has the freedom to specify terms and conditions of the work
- Operates its own business and is free to accept or refuse additional work.
Employee
- Unable to subcontract and/or delegate the work
- Paid either for the time worked, per activity or through commission
- Business provides all or most of the equipment required to complete the work
- Business is legally responsible for the worker and is liable for rectifying any defects to the work
- Works within and is considered part of the business.
You can read more about the difference in working arrangements here or you can speak to a tax lawyer for further information.
Tax obligations as a contractor
As mentioned above, contractors manage their own funds and pay their own tax. The ATO sets out the main tax obligations when you are working as a contractor. In summary, contractors are obliged to:
- Set aside money to cover the tax owed from contracting work (or have entered into a voluntary agreement with the hirer to withhold tax for you)
- Complete and lodge activity statements
- Register and pay GST if you provide services or assets through a platform for a fee
- Maintain records of income and business expenses
- Complete your tax return and the business and professional items schedule
- Provide you own business insurances, including personal income protection for yourself and workers compensation for persons working for you
- Set aside pay for holidays or if you get sick
- Determine whether you are receiving personal services income.
Contractors should also have an Australian business number (ABN) before doing the work. Without an ABN, your hirer may be able to withhold the top rate of tax as well as the Medicare levy from your pay.
Conclusion
Contractors are responsible for organising their working arrangement. It is important to know the difference between contractors and employees, to ensure that contractors are fulfilling their tax obligations and that businesses are not avoiding their responsibilities to workers. Contractors must be aware of their tax obligations early on to avoid later stresses and penalties from the ATO. If you still need help concerning your taxes, it is best to contact a tax lawyer.
