Employment
Employee
An employee is a person who works under a contract of service, is paid for their work, and is generally entitled to PAYG withholding, super and other statutory protections.
An employee is someone who works for another person or business under what the law calls a contract of service. In everyday terms, the employer directs how, when and where the work is done, the worker generally uses the employer's equipment and is part of the business rather than running their own, and the worker is paid for their time or effort rather than for a specific result. Employees can be full-time, part-time or casual, and the title on the contract does not decide the question.
For tax purposes, being an employee has several consequences. The employer must withhold PAYG tax from wages, report payments through Single Touch Payroll, and pay super guarantee contributions for eligible employees. The employer must keep payroll records and give the worker an income statement through the ATO systems. An employee generally cannot claim deductions for business-type expenses, only for work-related expenses that meet the usual deduction rules.
Employees also have rights under workplace laws, such as minimum pay, leave entitlements, notice and unfair dismissal protections, which are dealt with by Fair Work and state bodies rather than the ATO. A business that misclassifies employees as contractors can face back payments of super, PAYG and penalties, so it is worth understanding the difference carefully.
GST is not charged on wages. An employee does not need an ABN or to register for GST for their employment income, and cannot issue tax invoices to their employer for that work. Where an employee also runs a side business, that business has its own ABN and GST position, and its turnover is counted separately from wages. The employer cannot claim GST credits for wages, though GST credits are available for other business purchases such as equipment or software.
Employers also have other obligations linked to employees, such as workers compensation insurance and, in some states, payroll tax. These are administered by state and territory authorities rather than the ATO and vary by jurisdiction. Fringe benefits provided to employees, such as a car for private use, may bring fringe benefits tax into play, which is a separate tax with its own return.
A common misunderstanding is that signing a contractor agreement or quoting an ABN makes a worker a contractor. The courts and the ATO look at the whole working relationship. Another is thinking casual employees are not employees for tax. They are, and withholding and super still apply.
This is general information, so confirm how the rules apply to your workers with the ATO or a registered tax professional.
Worked example
A bakery hires Sam as a part-time baker at $28 per hour for 25 hours a week. Gross weekly pay is $28 x 25 = $700. The bakery withholds PAYG tax using the schedule matching Sam's TFN declaration, pays the net amount, adds super guarantee at the current legislated rate on top of the $700 (not deducted from it), and reports everything via Single Touch Payroll. No GST applies to the wages.
Practical tips
- Do not rely on a contract label alone. If a worker is in substance an employee, PAYG withholding and super still apply.
- Collect a TFN declaration and a super choice form from every new employee, and run each pay through STP-enabled payroll software.
- Check the ATO employee or contractor guidance whenever a role is unusual, rather than guessing.