When it comes to a business needing to hire workers in Australia, there are two possible ways to go about it – hiring employees and/or independent contractors.
There are benefits for a business to utilise both, but there are several key differences that separate the two. It’s down to the company to assess what is best for business, efficiency and compliance.
Hours of Work and Payment
Unlike independent contractors, employees are a part of the business and thus their hours are determined by the company itself. The basis of their payment comes from the time they put in and, on occasion, any commission attained. The responsibility lies with the business to take tax and super out of the employees’ salary.
Independent contractors, however, are paid for results of their labour from a predetermined rate at the commencement of the work through hours they set themselves. From an accounting perspective, this can be beneficial as the contractors themselves must pay their own tax and contribute to their super themselves, instead of the business taking care of it.
When an employee takes on a task that requires tools, it is the company’s responsibility to provide whatever the employee needs to get the job done. However, if the employee uses their own tools a reimbursement is given to cover such circumstances.
This isn’t the case with an independent contractor, instead they will supply their own tools for the job, setting up and taking down as they go. From an accounting perspective it can seem a loss to supply tools to an employee when a contractor will have the appropriate gear at no extra cost. However, the independent contractor will usually have recouping gear costs in mind when quoting for the job.
For employees, the responsibility is on the business for legalities and correcting work that has gone wrong. This protects the employee and allows them to work in safe conditions.
For an independent contractor, it’s not as easy. An independent contractor must personally fix any issues with their work and deal with any legal issues that may arise.
On the other hand, contractors have more flexibility to pick and choose the work they do, while employees must work according to their job description and direction provided by their employer.
Entitlements to Leave
A big difference between an employee and an independent contractor is leave entitlements. A business must supply their employees with benefits like annual leave, long service leave and sick leave, to name a few.
Independent contractors have no entitlements at all when it comes to leave. If they don’t work, they don’t get paid. Not only are they out of pocket, their projects may be impacted.
Getting it wrong comes at a cost
Employing someone when you really only need project-based help can be a costly mistake for your business. Or paying independent contractors when you could easily employ a worker full-time could also be inefficient and costly.
More than that, it could get you in hot water with the law. If you engage an independent contractor in a role that should be employed, you could have to pay back all entitlements with interest, and even pay a fine of up to $54,000.
There are some significant differences between having employees versus independent contractors, both have their own benefits and downfalls depending on your circumstances. It’s important to get advice from an experienced accountant, who can analyse your needs and understand the business benefits as well as any compliance issues. Contact the team at Nitschke Nancarrow now.
The information contained on this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Nitschke Nancarrow’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Nitschke Nancarrow specialises in accounting, tax and financial advice for superannuation. Contact us now for a no obligations discussion about your needs.