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If you’re working as a contractor, you’ll have different responsibilities and requirements to employees.
We can help you find out about:
- whether you are a contractor or an employee
- registrations for contractors
- earning income from your personal skills or effort
- business planning
- setting a price for your services
- contracts, intellectual property and dispute resolution
- lodging your tax return and paying tax
- Work Health and Safety (WHS)
- saving for your retirement
- training and licensing
- taxable payments reporting.
You can work as an individual (sole trader), or through your own company, partnership, or trust. You can be referred to as an independent contractor, sub-contractor or a 'subbie'.
Are you a contractor or an employee?
There are many differences between contractors and employees - understanding these differences is crucial for contractors as it can affect your tax and superannuation responsibilities, intellectual property ownership, and insurance.
As a contractor you’re operating a business that produces a result for an agreed price. In most cases you’re a contractor if you:
- are paid for results achieved
- provide all or most of the necessary materials and equipment to complete the work
- are free to delegate work to others
- have freedom in the way you work
- provide services to other businesses
- are free to accept or refuse work
- are in a position to make a profit or loss.
To help you to determine the difference between contractors and employees, use our Independent contractors decision tool. This tool gives an insight into whether someone is likely to be a contractor or an employee under common law. It takes just a few minutes to complete.
If you’re an employer you can use the Australian Taxation Office (ATO)’s Employee/contractor decision tool to work out if your worker is an employee or contractor for tax and super purposes.
Registrations for contractors
No matter what industry you’re working in as a contractor, there are some common numbers and registrations you may need.
Tax File Number (TFN) - If you are operating as a sole trader you must use your individual TFN. If you are part of a partnership, trust or a registered company you will need to apply for a separate TFN.
Goods and services tax (GST) - As a contractor, you’ll need to register for GST if:
- your business or enterprise has a GST turnover of $75,000.
- you provide taxi or limousine travel for passengers in exchange for a fare as part of your business, regardless of your GST turnover.
- you want to claim fuel tax credits for your business or enterprise.
If you don’t fit into one of these categories, registering for GST is optional.
Find out more in our information on GST.
Earning income from your personal skills or effort
Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual.
You can receive PSI in almost any industry, trade or profession. However, some common examples include financial professionals, information technology consultants, engineers, construction workers, and medical practitioners. PSI does not affect you if you're an employee receiving only salary and wages.
Income is classified as PSI when more than 50% of the amount you received for a contract was for your labour, skills or expertise.
Did you know?
If you have earned PSI, it’s important to understand whether the PSI rules apply to you, as it will affect the range of deductions you may claim in your business and your reporting requirements.
You can receive PSI even if you're not a sole trader. If you're producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.
Find out more:
Like any business, planning your business is an essential part of operating successfully as a contractor. Planning allows you to manage risks, identify opportunities, and set goals.
Developing a business plan can help you identify and develop responses to common issues that you may face as a contractors, like:
- approaching and securing contracts from potential hirers
- managing annual holidays and sick leave
- managing your relationship with your hirers
- protecting and dealing with any intellectual property you develop
- managing your superannuation, taxation and legal requirements.
Understanding these issues will also be useful when you are negotiating contracts with hirers. For more information, check out Business planning.
Setting a price for your services
One of the most important decisions you will make as a contractor is how much to charge for your services. You need to consider whether you will charge hourly or provide a fixed quote. The rate you charge should cover costs like:
- workers’ compensation
- leave provisions
- training and licensing fees.
You should agree to the amount you charge for your services with your hirer before commencing any work and write this into your contract. For more information, have a look at Selling, manufacturing and sourcing products.
When taking on work as a contractor, you will enter into a contract with your hirer. It is important for you to have a written contract so everything is clearly stated. Consider contacting your lawyer, industry association, or business advisor for help or advice.
By better understanding the contracts you enter into, you will be better placed to negotiate contracts that work for you. A well planned contract allows contractors and hirers to identify the working relationship, rights, responsibilities, and expected outcomes before starting work, and will help prevent misunderstandings in the future.
Intellectual property (IP) is an essential tool to protect your ideas and the work you generate as a contractor.
IP comes from applying your mind or intellect to create something new or original. IP can exist in varying forms, such as an invention, an idea, or a design.
Ownership of IP for hirer and contractor relationships is treated differently to employer and employee relationships.
- IP created by an employee is considered the property of their employer.
- IP created by a contractor for a hirer is by law considered the property of the contractor, unless otherwise stated in the contract.
The contract between the hirer and contractor should clearly outline ownership of any IP resulting from the work. This will prevent confusion or disputes over the IP at the end of the agreement.
Without a written contract that states IP ownership will belong to your hirer, you will automatically own the IP. If your hirer wishes to own the IP, this must be specifically outlined in the contract. To make sure your ideas are protected, it might be a good idea to seek legal advice about clauses relating to IP before signing a contract.
Disputes between hirers and contractors can arise due to breaches of the contract such as unpaid money or substandard work performance. While many disputes can be resolved through clear communication and negotiation, it’s important to make sure there is a dispute resolution clause in your contract.
You can check out our information on disputes for more general information.
Lodging your tax return and paying tax
Pay as you go (PAYG) instalments is a system to make regular payments towards your tax, so you don’t have to pay it all at once when you do your tax return. It only applies to you if you earn business and/or investment income over a certain amount. If you pay PAYG instalments, you still need to lodge an annual tax return. You can choose to voluntarily enter the PAYG instalments system early and pay before you lodge your first tax return to avoid ending up with a large tax bill.
You may also enter into a voluntary agreement with your hirer that will enable the hirer to withhold tax for you.
Did you know?
If you operate a business as a sole trader, you need to lodge a tax return including the supplementary section - business and professional items schedule for individuals - regardless of your income.
Work Health and Safety (WHS)
Work Health and Safety (WHS) refers to maintaining health and safety in the workplace. Contractors and hirers have legal responsibilities under Work Health and Safety legislation, which is governed by Australian, state, and territory WHS agencies.
As a contractor you are entitled to a safe and healthy workplace. When starting at a new workplace, you should be given a safety induction to the workplace and have relevant work processes clearly explained to you.
As a worker, you also need to comply with certain duties set out under the WHS laws, for example:
- ensuring that your actions do not put yourself or others at risk
- letting the appropriate people know about any workplace hazards
- reporting accidents and injuries.
If you employ or otherwise engage workers to carry out work for your business or organisation, you are required to meet your legal responsibilities under the applicable WHS legislation. Find out more at Safe Work Australia.
Contractors are generally responsible for their own insurance cover and like any business, bear the commercial risk for losses suffered from any work performed. Depending on what was agreed in the contract, both the contractor and the hirer may have liability insurance and workers’ compensation obligations.
You should consider obtaining personal accident and illness insurance to ensure that you’re financially secure should any accident or illness prevent you from working.
Liability insurance protects you in cases where you are found liable for damages to others, such as:
- a third party death or injury
- loss or damage of property or monetary loss as a result of your negligence
- damage or loss as a result of advice you gave, or your provision of unsafe products or services.
You can take out a number of different types of liability insurance including, public or product liability and professional indemnity.
Asset and revenue insurance protects you in the event of burglary, natural disaster, machinery breakdown, and other forms of damage. As a contractor, it’s likely that most of the equipment you use during the course of your contract will be your own, so you should consider asset and revenue insurance to help minimise the financial risk.
Did you know?
If you work from home, you should make sure that you have the correct level of insurance to protect your business. In many cases, home and contents insurance does not cover home-based businesses.
- Ensure that you are also protected from incidents including natural disaster, fire or theft.
- Many insurance policies don’t cover tools of trade, office furniture or computer equipment used for your business – you may need to advise your insurer that you require cover for your business assets.
Insurance and workers' compensation has more information about arranging and managing your business insurance.
Workers’ compensation is covered by state or territory laws which ensure benefits are paid to an employee or an employee’s family if the worker suffers a job-related injury, death or disease.
As a contractor you may not necessarily be entitled to workers’ compensation unless you have arranged your own accident protection insurance. However, you may be covered as a contractor in some states and specific circumstances. To find out more, check your state or territory legislation at WHS/OH&S acts, regulations and codes of practice.
Saving for your retirement
If you're a sole trader or in a partnership, you aren’t required to make super guarantee (SG) payments for yourself. However, you may still want to make personal contributions to your super as a way of saving for your retirement. If you do, remember to factor this cost into the amount you charge for your services.
Did you know?
Hirers must pay super contributions for contractors if they:
- are paid wholly or principally for their personal labour and skills
- personally do the contract work, and
- are paid for hours worked rather than to achieve a result even if they quote an Australian Business Number (ABN).
Find out more:
- Read more on super for the self-employed.
- Check out the ATO’s Super for employers.
- Work out if you have to pay super as an employer.
Training and licensing
Before starting work in any industry as a contractor, you should ensure that you are properly trained and licensed to do the job. In order to stay competitive and maintain a high standard of work, it’s important for you to develop a training strategy and keep your knowledge base up to date.
It’s also important for you to factor in training costs into quotes you present to hirers.
In some industries, you may need to have specific business licences in order to take on certain contracts. Australian, state and local governments are responsible for different business licences, permits, registrations and certificates.
Find out more:
- Australian Business Licence and Information Service (ABLIS) helps you find the government licences, permits, approvals, registrations, codes of practice, standards and guidelines relevant to your industry and location.
- Read our information on Training.
- Search Events to locate webinars, seminars, or workshops in your area.
Taxable payments reporting - what it means for you
Businesses in the building and construction, courier and cleaning industries have to report the total amount they've paid you each year as part of the taxable payments reporting system.
You’ll report the payments you receive from the businesses you have worked for during the year on your tax return.
There is no requirement for businesses to provide you with details of the information reported. However, you may request this information from them. To assist businesses, the ATO has developed a payee information statement.
You will need to report any payments you make to other contractors, for building and construction services, to the ATO.
Find out more:
- If you employ contractors in the building and construction industry, read the ATO's information on Taxable payments reporting.
- Read more on why the ATO collects information about payments to contractors.