Understanding the differences between an employee and a contractor can initially seem daunting, especially with all of Australia’s complex legislation governing employment relationships.
But don’t worry. We’re here to guide you through the specifics and break down precisely what sets them apart.
The Definition of Contractor vs Employee in Australia
The Australian law outlines specific characteristics and legalities for these two roles, and plenty of Australians make use of both of them.
For example, did you know approximately 1.4 million Australians are currently engaged in independent contracting work?
In legal terms, a contractor (also known as an independent contractor) is essentially a self-employed individual who provides services to a business or businesses, under agreed terms within a contract.
They control their own work, choose when and how to work, and are often employed for specific tasks or projects. They carry their own ABN (Australian Business Number) and invoice the business for the work they’ve completed.
On the other hand, an employee is a person employed directly by a business on a full-time, part-time or casual basis.
Employees work in the business premises or a place the employer decides, follow an employer-dictated schedule and are directed in their tasks by the business manager or another appointed authority.
Unlike contractors, employees don’t need an ABN as their wages are paid directly by the employer, who also looks after their superannuation, PAYG, and tax withholdings. Contractors need to manage their payments to the Australian Taxation Office effectively.
The Core Differences Between a Contractor and Employee
Jobs, risk management, and financial independence of contractors and employees differ in subtle ways.
- Control of Work: Contractors are responsible for managing their own workload. They call the shots and decide how, when, and where the work will be done, giving them a level of freedom employees do not typically enjoy. On the flip side, employees generally have less control over their tasks. Their employers dictate work hours, working conditions, and often, the methods and processes for completing tasks.
- Financial Risk: Contractors bear financial risks that employees usually don’t. Contractors typically invest their funds into resources and tools to complete the job. They’re also responsible for fixing mistakes or redoing tasks at their own cost. However, employees usually have their employers’ backing in such situations. If something goes wrong, their employer tends to bear the financial brunt.
- Financial Independence: As independent contractors, you can decide how much your services are worth and set your own rates. Employees, in contrast, are offered a salary determined by their employer.
The Contractor Lifestyle: The Pros and Perks
As you steer your career in the direction that offers you the most satisfaction, consider exploring the path of a contractor. So, let’s delve into the promising highlights of a contractor’s lifestyle.
The first noteworthy perk of being a contractor is flexibility. Unlike a traditional 9-5 job, contractors often have the liberty to choose their working hours, locations, and even the amount of work they undertake. For those who value autonomy and personal freedom over their schedules, shifting to a contractor’s role could be a winning card.
- Command Your Charge: As a contractor, you can decide what your time, skills, and expertise are worth. You can often create your own fees and negotiate on the rate you charge for your services. This financial control can sometimes lead to earning more than what you might receive as a regular employee. You can even decide whether to take on more than one client.
- Variety and Exposure: Another draw for many to contract work is the chance to dive into different industries or projects. As a result, you’ll have a broad sphere of experience, which can enrich your portfolio and make your services more appealing to future prospects.
Employee Life: Stability and Progression
If you’re considering employment in Australia, there are plentiful advantages to being an employee instead of an independent contractor.
First off, as an employee, you’ll enjoy employment security. This means you’ll have a steady job with a regular income and protection against unfair dismissal. This isn’t something a contractor can always count on.
You’re also more covered by employee entitlements that fall under the Fair Work Act, which independent contractors do not get.
For example, you’ll be given employee benefits. Employees in Australia often receive perks like paid annual and sick leave, superannuation contributions and, in some cases, fringe benefits such as health insurance or a company car. In contrast, contractors generally have to account for these expenses independently.
Another advantage you’ll relish as an employee is the training and career progression opportunities. Many employers invest in their staff through training and professional development programs.
This enhances your skills and opens the door for career advancement – a privilege usually out of reach for most independent contractors who carry the burden of their own development.
Note that we always recommend seeking independent legal advice on your working arrangement and the right option for you – whether running your own business or employed by someone else.
How Salary Compares for Contractors and Employees
When it comes to the financial side of things and comparing whether to go employee or contractor, the salary setup differs considerably.
As an employee, you might find that your salary is set out clearly and steadily – you know exactly what to expect in your bank account each payday.
Your employer generally makes superannuation contributions, and income tax is typically withheld directly from your pay, saving you the worry of calculating and paying it yourself. Your employer may also offer you entitlements such as paid annual, sick, and long-service leave.
But you want the numbers, so here they are:
The average income for a contractor in Australia is $88,238 per year, while the average income for an employee is $62,128 per year.
On the flip side, if you’re a contractor, your income could fluctuate more, as it usually depends on the terms of the contracts you secure. You don’t have the security that full-time employees do, and your working arrangements might shift at the drop of the hat.
You typically charge a fee for your services, and this might be determined on an hourly, daily, or project basis. You’re also responsible for handling your own taxes and superannuation.
The bonus? The potential to earn a higher income due to multiple clients and diverse projects.
Note that with the possibility of higher income through independent contractor work comes the responsibility of managing your own small business tasks, such as lodging your own tax returns, managing expenses, and setting aside money for superannuation.
Key Takeaways
Contractors are self-employed individuals, pursuing a specific project-based or time-limited contract, whereas employees hold a regular, ongoing position in a company.
- Contractors generally have more personal control and flexibility over their work than employees, but this comes with greater responsibility for their own affairs, such as tax and superannuation.
- On the other hand, employees enjoy benefits such as holiday and sick pay, employer superannuation contributions, a stable regular income, and coverage by the company’s insurance.
- The financial earnings can vary between contractors and employees. While contractors may charge higher rates, they must account for expenses that employees typically don’t, like insurance and self-funded retirement plans.
- Legal definitions in Australia outline specific rules and obligations for contractors and employees, impacting aspects like workplace rights, booking and tax obligations and benefits eligibility.
Now that you’ve delved into the nuances of being a contractor versus an employee in Australia, you might need some professional guidance to navigate your financial journey.
How We Can Help
Whether you’re leaning towards the independent lifestyle of a contractor or the consistent support of employee status, KNS Accountants are here to support you every step of the way.
Our team of seasoned tax professionals is experienced in handling various financial complexities associated with both roles, and we’re ready to help you make the best choices for your financial health and career aspirations.
Don’t hesitate to reach out to us. Let’s take the guesswork out of your finances and help you stride confidently towards your future. For our dedicated and illustrious team, there’s no challenge too great or question too small!
You might also like our guide on the 4 Different Types of Businesses in Australia.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.