Employee or contractor?¶

When someone does work for you, they are usually either an employee or an independent contractor. This is not just a label. The type of working relationship changes what you must do when you pay them.

This lesson explains why the difference matters for payroll and how the difference is worked out. It does not tell you how to classify any particular worker. The ATO is the authority on this, and it offers guidance and a tool to help.

In one line

Whether a worker is an employee or a contractor changes your payroll duties, and the ATO decides this by looking at the whole working relationship, not the label in a contract.

Why this matters¶

Payroll is built for employees. If your worker is an employee, you generally have duties that do not apply the same way to a contractor. According to the ATO, for an employee you usually withhold tax from their pay under PAYG withholding (pay as you go withholding), pay super for them if they are eligible, and they have workplace entitlements.

A contractor is different. The ATO explains that a contractor generally looks after their own tax, so in most cases you do not withhold tax from what you pay them. In some situations you may still have to pay super for a contractor. Because the duties are different, getting the type of relationship right matters for your payroll.

What you will learn¶

Why the employee-or-contractor difference matters for payroll
That the ATO looks at the whole working relationship, not a label
Where to find ATO guidance and when to get advice

Understanding the concept¶

The core idea, as the ATO describes it, is about whose business the work is part of. An employee works as part of your business. A contractor runs their own business and provides a service to yours.

The most important point is how the difference is decided. The ATO says you need to look at the whole working relationship, not one single thing. A label in a contract, such as calling someone an "independent contractor", does not decide it on its own.

This is not something to guess at. You are responsible for getting it right, and the ATO warns that an incorrect decision can lead to penalties. The ATO provides guidance and a decision tool to help you work it out, and if you are unsure it is sensible to get professional advice from your accountant or tax adviser.

This lesson does not give you a test to apply and does not tell you how to classify any worker. For that, use the ATO's own guidance and tool, or seek advice.

For accountants & bookkeepers

The ATO frames the question around whether the worker is serving in the engager's business (employee) or providing a service in the course of their own business (contractor), assessed by reference to the totality of the working relationship and the legal rights and obligations between the parties. A contract label is not determinative. Note that super guarantee can still apply to contractors engaged principally for their labour. Direct clients to the ATO's guidance and decision tool, and to independent advice, rather than to any rule-of-thumb.

Example¶

Priya runs a small design studio. She wants to bring on someone new. Whether that person ends up being an employee or a contractor will change what Priya does at pay time. If they are an employee, payroll comes into play, with PAYG withholding, super and payslips. If they are a contractor running their own business, the arrangement looks different.

Priya does not rely on a label or a friend's opinion. She reads the ATO's guidance, uses the ATO's decision tool, and speaks to her accountant before she decides. That way she starts the relationship on the right footing.

Common mistakes¶

Relying on a label in a contract, such as "contractor", to decide the relationship.
Assuming a person is a contractor just because they have an ABN.
Guessing at the answer instead of using the ATO's guidance and tool.
Not getting professional advice when the relationship is unclear.

How this works in myaccountant¶

In the app — myaccountant is for paying employees. You add and set up each employee, then run pay and lodge STP for them. Deciding whether a worker is an employee or a contractor happens first, using the ATO's guidance and your own advice. Once you know someone is an employee, you set them up in myaccountant.

Key points¶

Employee or contractor changes what you must do at pay time.
For an employee you usually withhold PAYG tax and pay super if they are eligible.
A contractor generally looks after their own tax; super can still apply in some cases.
The ATO looks at the whole working relationship, not a contract label.
You are responsible for getting it right; use the ATO's guidance and tool.
If you are unsure, get professional advice.

Learn next¶

General information only — not tax, super or financial advice.

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