What are my taxation obligations as an independent contractor?
There are special tax rules for independent contractors to ensure that you do not use business structures to avoid your income tax obligations. You may also have to arrange to pay your own tax. It's important to speak with your accountant or the Australian Taxation Office (ATO) to ensure you understand your tax obligations.
Tax File Number (TFN)
A TFN is a unique number issued by the ATO, used to administer tax. If you are operating as a sole trader you must use your individual TFN. If you are part of a partnership or a registered company you will need to apply for a separate TFN.
Australian Business Number (ABN)
Independent contractors need to have an ABN to use when dealing with other businesses. If you do not have an ABN before undertaking work, your hirer may legally withhold the top rate of tax, plus the Medicare levy, from your payment.
Goods and Services Tax (GST)
As an independent contractor you will probably need to register for GST. It's applied to most goods and services sold or consumed in Australia, so it's likely your service will be subject to GST.
Personal Services Income (PSI)
If you operate as a sole trader, you are entitled to claim certain expenses as tax deductions necessary to earn your income. The PSI rules may affect the deductions you can claim.
If you operate as a partnership, the partnership is entitled to claim certain expenses as tax deductions that are necessary to earn the partnership income. Each partner must pay tax based on net income. The PSI rules may affect the allocation of income and expenses between partners.
If you operate as a company or trust, the PSI rules may particularly affect you. The rules cover such issues as retaining income in the company, splitting income and some deductions. The ATO website tells you how to determine whether your income is classed as PSI.
Voluntary withholding tax arrangements with your hirer
You may be eligible to enter into a voluntary agreement with the hirer that will enable the hirer to withhold tax for you. This may simplify the administration of your taxation. Further information on this option is available from the ATO.
Payroll tax is a state tax on the wages paid by employers. Many state and territory payroll tax laws define wages to include payments to independent contractors. Hirers should check with their state/territory revenue office to determine whether payments are considered wages subject to payroll tax.
PAYG instalments allow you or your business to meet your income tax obligations.
PAYG instalments is a system for making payments each quarter towards your expected income tax obligation.
PAYG instalments are generally paid by independent contractors who earn a certain amount of income. The ATO will write to tell you if you must pay PAYG instalments.
For more information visit our page on PAYG instalments to find out if you need to Register for PAYG instalments.