Tax Status of Individuals

Determining a worker’s status depends upon the terms and conditions under which the work is performed.

The ATO has published a very useful Guide to assist businesses in the Building & Construction to determine if the “individual” they are paying is an employee or independent contractor for income tax purposes. This information can also be applied to workers in other industries.

Overview of Things to Consider

Factors to consider Employee Contractor
Control over work The employer has an implied right in industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit. A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their discretion.
Independence An employee works in the business of the payer. Their work is an integral part of the business. Although the work of a contractor is done for the business, it is not integrated into it but is ancillary to it.
Payment Payment is often based on the period of time worked, but an employee can also work on ‘piece rates’ or commission. Payment is dependent on the performance of the contracted services.
Commercial risks An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee. A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy any defective work at their own expense.
Ability to delegate An employee performs the work personally and generally cannot subcontract the work to someone else. Unless otherwise specified in the contract, a contractor can subcontract or delegate the work.
Tools and equipment The employer, except when specifically agreed otherwise, usually provides tools and equipment. Generally, a contractor provides their own tools and equipment.

The above table is an excerpt from the document “The building and construction industry – Status of workers – Employee or independent contractor?” published by the ATO. View the document in full.

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