It is important to understand the difference between employees and independent contractors for super guarantee purposes.
Contractors who run their own businesses and sell their services to others have different obligations to their super than what employees in a business may usually have.
Hiring contractors
As an employer, you have a choice between hiring contractors and employees – both are legitimate as long as the conditions of the working contract match the worker’s classification.
It’s important to understand the difference between employees and independent contractors because:
- It changes your obligations for paying and reporting tax, superannuation and other entitlements for your workers; and
- Penalties and charges may apply if you incorrectly classify an employee as a contractor and fail to meet the relevant obligations or entitlements for that worker.
Although you generally don’t need to make super guarantee contributions for independent contractors, you may be required to make contributions for a contractor where the contract engaging them is wholly or principally for their labour.
If they’re registered for GST, you will need to pay the appropriate GST to them for the services or work they provide to your business.
Our KMT tax adviser will be able to help your business meet the superannuation obligations.
How does superannuation & contracting work?
A contractor (also known as an independent contractor, a subcontractor, or a subbie) who is paid wholly or principally for their labour is considered to be an employee for superannuation guarantee (SG) purposes.
It doesn’t matter if the contractor has an Australian business number (ABN).
Make super contributions for contractors if you pay them:
- Under a verbal or written contract that is mainly for their labour (more than half the dollar value of the contract is for their labour)
- For their personal labour and skills (payment isn’t dependent on achieving a specified result)
- To perform the contract work (work cannot be delegated to someone else).
In other words, if a contractor is being contracted to an outside business than their own to perform their usual work or labour, the employer must contribute to their super the same way they would to any other employee.
For example, an electrician who runs their own business and has been subcontracted by a larger business.
They are performing labour but also providing materials (ie, themselves plus a toolbox plus a van full of powerpoints and wiring etc), they would be seen as a contractor and not an employee for super purposes. They must pay themselves super, in this case.
However if they are sub-contracted to perform labour only, then the company that has sub contracted them may be liable to pay super on the amount that they pay to their contractor. This would be the case where the electrician just turns up with their tool box and everything else is provided by the “employer”.
If they are in an employment-like relationship with the person with that they entered their contract, they may need to have their super paid to them by their contract employer. In order for super to be applied from what you earn, the contract must be directly between you and your employer. It cannot be through another person or through a company, trust or partnership.
It is important that both parties in the process are aware of their super obligations during the contracted period. There can be significant penalties for employers who use contractors if they fail to correctly pay super. Each case regarding contractors and super needs to be assessed independently to ensure that you are doing the right thing. There is no definitive black and white line between a contractor and a contractor in an employment-like relationship that can be obviously seen after all.
Download Contractor vs Employee: The ATO’s Response
If you are uncertain whether you need to pay super on behalf of a person working for you, talk to our KMT tax adviser.
Source: ATO
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or get professional advice from your accountants at KMT Partners.
