If you're relatively new to the business world and are running a growing operation, you may need support from other people. These individuals can perform certain tasks for you in return for remuneration, but you need to be particularly careful when it comes to the payment of tax. In this case, you will need to know whether that individual should be classified as an employee or a contractor, but it can often be hard to differentiate. What do you need to know?

Understanding the Tax Implications

A contractor is essentially an individual that is in business in their own right and provides services to other entities while accounting for their tax affairs. Of course, this is very different to an employee who is employed by the company on a part-time or full-time basis and receives remuneration from that employer specifically. In the latter case, the employer must account for payroll taxes and other considerations. However, in the case of a contractor, then the company would simply agree on terms with that individual and leave them to take care of their own tax affairs.

Taking the Easy Route

It's often tempting for a company to try and classify a worker as a contractor because there is much less paperwork involved, and they do not have to deal with payroll taxes. Yet the ATO is very aware of these scenarios and will crack down on any company that gets this wrong, either intentionally or unintentionally.

Contractor or Employee?

You will need to assess your relationship carefully with each entity before you can treat them as a contractor. It doesn't matter if they have their own tax number and treat themselves as contractors, as your specific relationship may reclassify them as employees.

Assessing the Needs

Have a look at the services in question. Do they represent something that you do not ordinarily require on a day-to-day basis? If that entity provides you with a one-off service and, crucially, provides the same types of service to the public, you may be safe. However, if that entity gets a significant amount of its gross trading income from your business alone, you may need to classify them as employees. Also, if you dictate how their work should be carried out rather than just giving them an outline of what you need, this level of control could be interpreted as an employer/employee relationship.

The Risk of Getting It Wrong

It's important to get this right as you could be liable for a significant amount of back taxes, costs or fines if you are subject to an ATO investigation in the future. To be safe, discuss the matter with a business tax accountant before you go ahead.

Contact a business tax accounting service to learn more.