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Employee or contractor: The pros and cons

Last updated: 18th Oct 2019

Knowing you need help to run your trades business is half the challenge. But do you need an employee or contractor? We compare the two.

If you haven’t yelled ‘tools down’ for a while, or you’re expecting a particularly busy period coming up, you’ve probably considered taking on some extra help.

You can employ someone or pay a contractor to do the work for you. Either option can seem complicated if you’ve never hired anyone before – particularly if you’re not sure which arrangement best suits your business.

Before you decide, it helps to know the main differences between the two employment types, including your financial obligations as an employer. Let’s compare the two.


What’s an employee?

An employee works regularly in your business and is usually paid a salary for their hours worked. They’re also entitled to leave or loading benefits, depending on whether they’re employed full time or casually. An employee is expected to perform their work using tools your business provides and, as their employer, you directly control how and where they perform their tasks. When you hire an employee, you’re responsible for all their work, including any liability or defects.


What’s a contractor?

A contractor, on the other hand, runs their own business and sells their services to other businesses or companies. Even when you hire a company to complete work for your business, it’s still considered a contractor relationship for tax and superannuation purposes. Unlike an employee, a contractor has the freedom to choose their own working hours and control how they complete their work (using their own tools and equipment). Usually, a contractor is paid for their work once they’ve completed it, at an agreed project or hourly rate, and are liable if they don’t do the job up to scratch.


How to know what you need?

Sometimes, a contractor will have specialist skills that are hard to find in an employee. Some tradies prefer to operate as self-employed contractors so they can work on multiple projects at the same time. If you only need support for a few weeks, or for a specific task that you won’t need help with again, a contractor is the way to go.

If you’d prefer to train someone to perform their work in a certain way and to your schedule, then an employee may be a better fit. However, it’s important to understand your legal obligations before hiring either party.


Know your obligations

Tax, superannuation, and other obligations are different for employees and contractors. If you take on an employee, you’ll be responsible for withholding PAYG tax from their salary and reporting the amount withheld to the ATO. You’ll also be required to pay superannuation to their nominated super fund each quarter (or month depending on the super fund).

Contractors, on the other hand, manage their own tax and super obligations, as well as their relevant licences and insurances, and so are generally easier to take on in the short term.

Likewise, if you’ve hired your contractor from a labour hire company, your business will more than likely have a contract in place with the firm whereby they have responsibility for the person’s tax and .

Let’s break it down:

  An employee A contractor
Payment Is paid regularly based on the number of hours worked, or an agreed price per item or activity, or commission. Submits an invoice for the completed work at the end of the contract period based on an agreed quote.
Equipment, tools and other assets Uses tools provided by the employer. If they provide or purchase their own tools, their employer must provide a tool allowance or reimbursement for the total cost. Uses their own tools and equipment unless otherwise agreed as part of the contract. No allowance or reimbursement is provided by the employer.
PAYG tax Requires their employer to withhold tax (PAYG tax) from their wages, and report and pay it to the ATO. Pays their own tax unless otherwise agreed with the payer, or when they don’t quote their ABN to the payer.
Superannuation Is entitled to have superannuation contributions paid by their employer into their nominated super fund. Is responsible for their own superannuation payments unless the contract is principally for their labour.
Fringe benefits tax Requires their employer to report and pay fringe benefits tax (FBT) when provided with fringe benefits. Is not entitled to fringe benefits tax (FBT).
Licences/insurances Is not required to hold their own licences or insurances, and will not be personally liable for the costs of rectifying any defects in their work. Is required to hold their own licences and insurances, and will be liable for any costs associated with rectifying defects in their work.
Employment benefits Entitled to paid annual leave, sick leave, and long service leave, or receives loading in lieu of leave entitlements. Is not entitled to employment benefits.

Some accounting software programs, like QuickBooks Online, can help you navigate payroll regardless of the employment type. So, whether your workers are employed full time, paid hourly, or hired on project basis, these tools allow you to process payroll, tax, and superannuation straight from the platform.

Finding the right person for the job starts with understanding what each hire means for your business. Getting it wrong could cause unintended issues and leave you with hefty penalties. So, if you’re still unsure, ask a professional advisor.

Learn more about how QuickBooks Online can help you hold onto your cash.

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