The subcontractor versus employee issue is a hot topic at the moment given the rulings from the State Revenue Office on payroll tax in medical clinics. These rulings have stated that doctors who contract their services to the clinics in most cases will be deemed employees for payroll tax which has significantly increased the payroll tax liabilities of these clinics.
However, the issue is just as important for small businesses and for individuals who have been asked to set up an entity so they can contract with their “supplier” for their services. So what are the differences between the two?
An employee is someone who works regularly for an employer and is told what to do and how to do it. They get tax taken out of their salary they are paid, which is usually paid at a fixed, agreed hourly rate based on the number of hours worked. They are paid the required 11% super and are covered by the WorkCover policy of their employer. In addition, they are allowed to take annual, sick and compassionate leave and could be entitled to other benefits depending on the applicable Employment Award they are employed under.
A subcontractor is someone who operates their own business. They are engaged to achieve a result, provide their own tools and are liable to correct any defects. They usually have many different clients who engage their services and sometimes can utilise other contractors to help provide their service. They issue an invoice under their ABN (charging GST if registered and applicable) which does not have any tax withheld. As such, the tax is owed when their tax returns are lodged. A subcontractor is usually not entitled to leave, not covered by WorkCover and may not have super paid.
So what risks are present? For an organisation, the risk is that the subcontractor they are using may be deemed an employee which could raise unexpected liabilities for payroll tax, WorkCover and superannuation. For the individual, it is understanding that although they may receive a higher hourly rate, they still owe tax on the income, are not entitled to leave and may not have super paid or be covered by WorkCover. There could also be additional compliance costs in setting up and maintaining their structure. So often for clients, the financial benefits they thought they were getting evaporate when examined.
If you have any queries or need assistance with your situation, please do not hesitate to contact us.