How do I set up a Voluntary Agreement contractor?¶

A Voluntary Agreement is an arrangement where you and a contractor agree that you'll withhold tax from their payments, even though they invoice you under their own ABN. Setting one up means keeping the income type and tax category in step and adding the contractor's ABN — if they don't match, the ATO rejects the pay run. Work through the steps below and the Readiness badge will tell you when everything lines up.

Step 1. Set the income type on the Employment tab¶

Open the worker under Payroll → Employees, go to the Employment tab and set Income Type to Voluntary Agreement.

The Employment Type switches to Contractor automatically — a Voluntary Agreement worker is a contractor, not an employee. A note on the tab reminds you that these workers also need their ABN and the matching tax category.

Step 2. Match the tax category on the Tax tab¶

Go to the Tax tab and set Tax Category to V - Voluntary Agreement. The income type and the tax category must both point at "Voluntary Agreement":

If the tax category is Voluntary Agreement but the income type isn't, the ATO rejects the submission.
If the income type is Voluntary Agreement but the tax category isn't, the pay run may still lodge, but tax is withheld at the wrong rate.

The app guides the order for you. When you set the income type first, the Tax tab lets you pick the Voluntary Agreement category; if you're changing an existing worker, save the tax category first, then update the income type.

Step 3. Enter the contractor's ABN¶

Still on the Tax tab, enter the contractor's ABN. This is required for a Voluntary Agreement — the contractor invoices under their ABN, and it's reported to the ATO with the payment. The field checks the ABN is valid as you type.

Step 4. Set the withholding rate¶

Choose the Tax Scale and enter the Voluntary Withholding Rate (%) you've agreed with the contractor:

Commissioner's Instalment Rate — use the rate the ATO has given the contractor.
No Commissioner's Instalment Rate — use the flat rate you've agreed (commonly 20%).

Enter the percentage in the Voluntary Withholding Rate box so tax is withheld at the agreed rate.

Step 5. Check the Readiness badge¶

Back on the Employees list, each worker shows a Readiness badge. For a Voluntary Agreement it flags, among other things:

Income type and tax category don't match — one says Voluntary Agreement and the other doesn't. Fix whichever is wrong (Step 1 or Step 2).
Missing ABN — add it (Step 3).
Withholding rate is 0% — set the agreed rate (Step 4), otherwise no tax is withheld.

Clear these before you finalise the pay run and your STP lodgement will go through cleanly.

Understand the concepts (Academy):

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