.png)
When hiring workers, businesses often need to decide whether to classify them as employees or independent contractors. This distinction is more than just a label—it impacts how workers are paid, taxed, insured, and entitled to benefits. Getting it wrong can lead to costly penalties from the ATO and Fair Work, so it's important to understand the key differences.
The Core Differences: Employees vs Contractors
Definition & Control
Employees work under the direction and control of the employer. Their work hours, tasks, and location are determined by the employer, and they are typically integrated into the business.
Contractors operate independently and have more control over how they complete work. They can set their own hours, choose their methods, and may even delegate work to others.
Comparison Table: Employees vs Contractors
Factor | Employee | Contractor |
Control Over Work | Employer controls how, when, and where the work is done. | Contractor decides how, when, and where work is done. |
Payment | Regular wages/salary (weekly, fortnightly, or monthly). | Paid per contract, project, or hourly rate upon invoice submission. |
Leave Entitlements | Paid annual, sick, and long service leave under the Fair Work Act. | No leave entitlements—contractors must factor this into their rates. |
Superannuation | Employer must pay Super Guarantee (SG). | Generally responsible for their own super. May be entitled to SG if working primarily for one business. |
Workers’ Compensation | Covered by employer’s workers’ compensation insurance. | Not covered—must arrange their own insurance. |
PAYG Withholding Tax | Employer withholds PAYG tax and remits to the ATO. | Responsible for their own tax obligations. |
GST & Invoicing | No GST obligations. Paid via payslip. | No GST obligations. Paid via payslip. |
ABN Requirement | Not required. | Must have an ABN to work as a contractor. |
Tools & Equipment | Provided by employer. | Usually supplies own tools and equipment. |
Termination | Entitled to notice of termination and potential redundancy pay. | Termination conditions depend on contract terms. |
How Each Worker is Paid & Taxed
Employees
✅ Paid a regular wage/salary, with PAYG withholding tax deducted each pay cycle.
✅ Superannuation contributions are made by the employer.
✅ Eligible for leave entitlements such as sick leave, annual leave, and long service leave.
✅ Covered by workers' compensation insurance paid by the employer.
Contractors
✅ Paid per invoice—must set aside their own tax and submit BAS/IAS payments if required.
✅ No automatic super contributions—they must save for their own retirement.
✅ Responsible for GST registration if earning over $75,000 annually.
✅ Must arrange their own workers’ compensation insurance (some may opt for personal income protection insurance).
Examples
Example 1: A Café Hiring a Barista
A café owner needs a new barista and is considering hiring an employee or a contractor.
Hiring as an employee:
The barista will work regular shifts and be a core part of the team.
The business must cover super, PAYG tax, leave, and workers’ comp.
The employee is paid $28 per hour + super + leave entitlements.
Engaging as a contractor:
The barista can be a freelancer who works across multiple cafés.
No super or leave payments required.
The contractor might charge $40 per hour to account for tax & expenses.
Outcome: The café owner chooses to hire an employee for consistency and team stability.
Example 2: A Construction Business Hiring a Carpenter
A construction company needs a carpenter for a 6-month project.
Hiring as an employee:
The carpenter is on payroll and receives $35 per hour + super + benefits.
The employer is responsible for tax, super, and workers' comp.
Engaging as a contractor:
The carpenter supplies their own tools, sets their own hours, and invoices $55 per hour.
The contractor is responsible for their own tax, super, and insurance.
Outcome: The business engages a contractor for flexibility and to avoid ongoing payroll costs once the project is complete.
Cash Flow Considerations:
Paying an Employee vs. Paying a Contractor
✅ Employees:
Businesses must cover wages, superannuation, PAYG tax, leave entitlements, and workers' compensation.
These costs impact quarterly BAS lodgements, requiring PAYG withholding payments to the ATO.
Regular payroll costs must be budgeted, including periods of leave where an employee is paid but not working.
✅ Contractors:
No PAYG withholding, super, or leave obligations—contractors must set aside their own tax & super.
The business only pays for work completed (via invoices), making cash flow more predictable.
Higher upfront hourly rates but no ongoing employment costs.
Example:
Hiring an employee at $30/hr actually costs $36+ per hour once super, workers’ comp, and leave are factored in.
A contractor may charge $45-$55/hr but the business avoids other employment costs.
Associated Costs of Training & Termination
Hiring an employee comes with ongoing training and development costs to ensure they meet business needs. This includes onboarding, compliance training, software skills, and industry-specific certifications, which require both time and financial investment. Unlike contractors—who are typically hired for their existing expertise—employees often need upskilling and support to grow into their roles.
Termination costs can also be significant, particularly if an employee is entitled to redundancy pay, notice periods, and accrued leave payouts. If a business needs to downsize or restructure, these obligations must be factored into financial planning. In contrast, ending a contractor relationship is typically as simple as finishing the contract or project, with no additional payout requirements.
Tax & Compliance Considerations
Taxable Payments Annual Report (TPAR)
Businesses in industries like building & construction, cleaning, and IT services must report payments made to contractors in their TPAR each year.
This report ensures that contractors are declaring their income correctly.
What Happens If a Contractor Doesn’t Provide an ABN?
If a contractor does not supply an ABN, businesses must withhold tax at the highest rate (47%) before making payments.
Contractors who do not have an ABN must complete a Statement by a Supplier form to avoid tax withholding.
Find out more from the ATO here: Employee vs. Contractor
When is One Option Better than the Other?
When to Hire an Employee
✔️ You want long-term stability in your workforce.
✔️ The worker needs to be trained and managed within your team.
✔️ The role requires full-time or regular hours.
✔️ You want to provide benefits like sick leave, annual leave, and career development.
When to Hire a Contractor
✔️ The work is project-based or short-term.
✔️ The person has specialised skills that don’t require day-to-day management.
✔️ You don’t require set work hours or regular commitment.
✔️ You want to avoid extra costs like leave, superannuation, and payroll tax.
What This Means for Workers: Employee vs. Contractor Perspective
Why an Employee Might Prefer This Arrangement
✅ Stable income and consistent work hours.
✅ Paid leave and job security.
✅ Superannuation paid by the employer.
✅ No need to worry about tax & compliance—it’s all handled by payroll.
Why a Contractor Might Prefer This Arrangement
✅ Greater flexibility—can work for multiple clients.
✅ Potential for higher earnings as rates may be higher to cover tax, leave, and super.
✅ Control over work schedule & projects.
✅ Can claim more business-related expenses (e.g., tools, travel, training).
Before making a decision you really need to consider a range of factors as it really comes down to your individual your business structure, budget, and workforce needs. The wrong classification can result in penalties from the ATO or Fair Work, so it’s important to get it right.
Final Considerations;
Do you need long-term staff stability or project-based work?
Can your business afford additional employment costs (super, leave, PAYG tax)?
Are you correctly meeting tax, payroll, and reporting obligations for each type of worker?
At MJA Business Solutions, we can help review your hiring needs and ensure compliance with Fair Work and ATO regulations. As well as help managing payroll, quarterly and annual compliance. Want to know more?
👉 Contact us today to discuss the best options for your business!
Comments