Employment
Independent contractor
An independent contractor is a worker who runs their own business, supplies services to clients for a fee, and is not an employee of any of them.
An independent contractor is a type of contractor who operates their own business and offers services to the public or to multiple clients, rather than working as part of one client's business. The word independent stresses that the contractor controls their own methods, hours and tools and can take on other work. Tradespeople, consultants, freelancers and many couriers are typical examples, though the label alone does not decide the legal position.
The key features the ATO looks at include whether the worker is free to subcontract or delegate the work, whether they provide their own equipment, whether they are paid for a result rather than for time, whether they carry the risk of cost overruns, and whether they have the freedom to work for others. A worker who meets many of these indicators is more likely to be an independent contractor than an employee.
An independent contractor must manage their own tax. They report income in their income tax return, claim deductions for business expenses, and may need to pay PAYG instalments on their business income. They are responsible for their own super contributions, although they may make personal contributions and, depending on their circumstances, claim a tax deduction. Contractors generally do not receive paid leave or other employee entitlements from the clients they serve.
GST applies once the contractor's GST turnover reaches $75,000, and they must register for GST at that point. Many independent contractors register earlier, voluntarily, so they can claim credits on equipment and software purchases. When registered, they add GST to taxable fees and give clients a tax invoice for supplies over $82.50 including GST. Be careful with the GST turnover test, since it is looked at both for the current month and over the next 12 months, and includes all business income.
Clients who engage independent contractors need to check that they have an ABN. If not, the client may have to withhold tax from payments, and cannot claim GST credits. The client should also be aware that, where the contract is principally for the personal labour of the worker, the super guarantee rules can treat the worker as an employee for super purposes, even though they are a contractor for other purposes.
A common error is to think that having a written contractor agreement settles the matter. It does not. Another is to ignore PAYG instalments, which can result in a large tax bill after year end. Contractors should plan for tax as they earn.
This is general information, so confirm the position for your own arrangements with the ATO or a registered tax professional.
Worked example
Anna, a freelance bookkeeper and sole trader not registered for GST, bills three clients a total of $6,000 in one month, with no GST added. Over the year her business income is $60,000, below the $75,000 threshold. She keeps tax invoices for her equipment, claims deductions for those expenses in her tax return, and sets aside part of each payment, say 20%, which is $1,200 in that month, for income tax.
Practical tips
- Check the 12-month GST turnover figure regularly. If you expect to reach $75,000, you must register within 21 days.
- Put aside part of every payment for income tax, as clients will not withhold it for you.
- Ask the ATO or a tax professional if you are unsure whether you are a contractor or an employee. The answer affects super and withholding.