When growing your business in Perth, deciding whether to hire employees or contractors is more than just a staffing choice—it comes with significant tax implications. Each type of worker is treated differently under Australian tax law, and getting it wrong can lead to compliance issues, ATO penalties, and unexpected costs.
Understanding these differences is vital for small business owners. With guidance from a qualified business tax accountant in Perth, you can ensure your hiring practices align with ATO rules while managing tax obligations effectively.
Understanding the Difference: Contractor vs. Employee
Employees typically work under your direction, follow set hours, and use your tools or equipment. You’re responsible for PAYG withholding, superannuation, and workers’ compensation.
Contractors, on the other hand, run their own business. They often have an ABN, invoice you for their services, and pay their own tax and super. They usually work on a project basis and provide their own tools and insurance.
ATO uses several criteria to determine the status of a worker—regardless of what you’ve called them in a contract. A small business tax accountant in Perth can help interpret these rules to avoid misclassification.
Tax and Super Obligations
- Pay As You Go (PAYG) Withholding
For employees, you must withhold tax from their wages and report it to the ATO via STP (Single Touch Payroll). For contractors, you usually don’t withhold tax unless they don’t quote an ABN or are subject to a voluntary agreement.
Incorrectly treating an employee as a contractor can result in backdated PAYG liabilities, interest, and penalties. A business accountant in Perth can help establish correct reporting structures.
- Superannuation Contributions
You must pay superannuation (currently 11%) for eligible employees. Many business owners are surprised to learn that certain contractors are also entitled to super—particularly if they are paid mainly for their labour, even if they have an ABN.
This area is complex and a frequent audit trigger. It’s wise to consult a business tax accountant in Perth to assess each contractor’s super eligibility.
- Payroll Tax and Workers’ Compensation
In WA, if your total taxable wages (including contractor payments that meet specific criteria) exceed the threshold, you may be liable for payroll tax. Employees are automatically included in this calculation; some contractors are too.
You also need to provide workers’ compensation for employees. For contractors, it depends on the nature of the work arrangement.
GST Considerations
Employees are not registered for GST and cannot charge it. Contractors may charge GST on their invoices if they’re registered. This affects your GST credits and tax invoices.
To stay compliant, make sure you have proper records of ABNs, invoices, and GST registration for all your contractors. A business accountant in Perth can help you manage this in your accounting software.
ATO Penalties and Risk of Misclassification
Incorrectly classifying an employee as a contractor may lead to:
- Back pay of superannuation and leave entitlements
- PAYG withholding liabilities
- Penalties for failing to meet Fair Work requirements
- Potential audit and reputation risk
ATO audits are becoming more data-driven, often triggered by incorrect or inconsistent payroll reporting. Having a small business tax accountant in Perth ensures you stay ahead of potential issues.
Best Practices to Stay Compliant
- Use ATO’s Employee/Contractor Decision Tool
This tool offers guidance, but results should still be reviewed by your accountant. - Keep Detailed Agreements and Records
Ensure contracts clearly define roles, payment terms, and responsibilities. - Review Working Arrangements Regularly
Work nature may change over time. A contractor could effectively become an employee. - Work with a Qualified Business Accountant
A business tax accountant in Perth can review your contractor relationships and advise on correct classifications, obligations, and documentation.
Case Example
A Perth-based construction company engaged several contractors on a long-term basis. After an ATO review, it was found that the contractors were effectively working as employees—same hours, provided tools, no ABN invoices. The business was required to pay unpaid super and backdate PAYG withholdings for two years.
Had the business consulted with a business accountant in Perth earlier, this risk could have been avoided with proper contracts and structure.
Conclusion
The choice between hiring a contractor or employee has serious tax consequences. Misclassifying can cost your business time, money, and stress. With support from an experienced small business tax accountant in Perth, you can make informed decisions, stay compliant, and focus on running your business confidently.
Need help navigating tax and staffing obligations?
Visit our website today https://perthtaxpeople.com.au/business-accountants-perth/ to speak with a trusted business accountant in Perth and ensure your business stays ATO-compliant.
Frequently Asked Questions (FAQ)
Q1: Can I hire a contractor to avoid paying superannuation?
No. If the contractor is mainly providing their labour, you may still be required to pay super—even if they have an ABN.
Q2: What happens if I misclassify a worker?
You may owe back pay, superannuation, PAYG, and face penalties. Always verify status with your accountant.
Q3: Do I need to issue a PAYG summary to contractors?
Not usually, unless they are under a voluntary agreement. Most contractors manage their own tax.
Q4: How do I know if a contractor is truly independent?
Consider control, tools used, payment method, and whether they can subcontract. A business accountant in Perth can assess the relationship properly.
Q5: Should I keep records of contractor ABNs and insurance?
Yes. This protects you from ATO issues and ensures GST and tax compliance. Always verify contractor ABNs using the ABN Lookup tool.
