The structure of the workforce is transforming, and many business owners are struggling to make sense of the rapid changes. The problem is that regulation, especially from the tax office, will always be a few steps behind changes that are happening in the real world. Sadly, this often means that compliance requirements are not befitting to current business practices. An area where this is glaringly apparent is the tax treatment of independent contractors vs employees.
The option to hire independent contractors increases flexibility, expertise and access to equipment, making it attractive to small business owners. Furthermore, many Australian workers are increasingly opting to work freelance instead of seeking permanent employment.
Unfortunately, business owners are often surprised to find out that there can be some severe penalties for incorrectly treating an employee as an independent contractor for tax purposes. The ATO’s definitions of an employee and an independent contractor are fairly strict, and tend to come down on the side of classifying people as employees.
Businesses that incorrectly treat employees as contractors can face a set of heavy financial penalties including missed PAYG payments and super guarantee charges for missed superannuation payments. The super guarantee charges will include the actual super guarantee amounts (currently 9.5% of the employee’s gross pay) and penalties.
The ATO uses a combination of compliance and education to help employers ensure that they are correct in their tax treatment of workers.
Generally, an independent contractor will have a high degree of flexibility over their work, provide their own equipment, and will accept risk and liability for poor work. Independent contractors are required to pay their own taxes and make decisions in regards to how much income to contribute to their superannuation accounts.
Employees who perform work under the direct supervision of their employer, should not take on risk for their own work and have their superannuation paid by their employer. Employees have their taxes paid through the PAYG system.
Employers should note that even if a person has been treated as an independent contractor, they may still be eligible to file for unfair dismissal claims. In the event that you are unsure as to whether or not your tax treatment of employees and independent contractors is compliant, seek advice from our office.
While there are many financial advantages to having independent contractors in place of employees, for example avoiding the super guarantee and payroll tax, you will likely suffer in the long run if you continue to be non-compliant.