Worker definitions

It is important to know if a worker is an employee, independent contractor or volunteer of your organisation, as this status may affect the tax treatment of dealings between the individual and the organisation.

You should always consider the facts and circumstances of each individual when determining whether they are a volunteer, employee or independent contractor.

Employee – definition

Generally, an individual is considered to be an employee if they meet the following requirements:

• are paid for time worked
• receive paid leave – for example, sick, annual, recreation or long service leave
• are not responsible for providing the materials or equipment needed to do their job
• must perform the duties of their position
• agree to provide their personal services
• have work hours set by an agreement or award
• are recognised as part and parcel of your organisation’s business
• do not take commercial risks and cannot make a profit or loss from the work performed.

When your worker is an employee, there are certain things you need to do in relation to:

• PAYG withholding
• super
• fringe benefits tax.

PAYG withholding

Your PAYG withholding obligations include:

• registering for PAYG withholding if you have not already
• withholding amounts from wages and other payments you make to your employees
• reporting and paying the amounts withheld to the ATO through your activity statement
• preparing payment summaries and lodging your annual report
• keeping PAYG withholding records.

Independent contractor – definition

An independent contractor is an entity (such as an individual, partnership, trust or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor meets the following requirements:

• is paid for results achieved
• provides all or most of the necessary materials and equipment to complete the work
• is free to delegate work to other entities
• has freedom in the way the work is done
• provides services to the general public and other businesses
• is free to accept or refuse work
• is in a position to make a profit or loss.

Difference between employees and contractors

An employee works in your organisation and is part of your organisation, whereas a contractor is running their own business.

The following table outlines the differences between employees and contractors based on the six factors which need to be considered when determining whether a worker is an employee or contractor.

Employee Characteristics of an employee include the following:	Contractor Characteristics of a contractor include the following:
Ability to sub-contract/delegate: the worker cannot sub-contract/delegate the work - they cannot pay someone else to do the work.	Ability to sub-contract/delegate: the worker is free to sub-contract/delegate the work - they can pay someone else to do the work.
Basis of payment: the worker is paid • for the time worked • a price per item or activity • a commission	Basis of payment: the worker is paid for a result achieved based on the quote they provided.
Equipment, tools and other assets: • your business provides all or most of the equipment, tools and other assets required to complete the work, or • the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.	Equipment, tools and other assets: • the worker provides all or most of the equipment, tools and other assets required to complete the work • the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.
Commercial risks: the worker takes no commercial risks. Your business is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work.	Commercial risks: the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
Control over the work: your business has the right to direct the way in which the worker performs their work.	Control over the work: the worker has freedom in the way the work is done subject to the specific terms in any contract or agreement.
Independence: the worker is not operating independently from your business. They work within and are considered part of your business.	Independence: the worker is operating their own business independently from your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.

When your worker is a contractor there are certain things you may need to do in relation to:

• PAYG withholding
• Super.

You will not have any fringe benefits tax obligations.

PAYG withholding

Generally, contractors will look after their own tax obligations and you usually do not have to withhold amounts from payments you make to them.

However, you may be required to withhold from payments if:

• the contractor does not quote their ABN to you
• you enter into a voluntary agreement with the contractor to withhold tax from their payments.

If you withhold from a payment, you will need to:

• report and pay the amounts withheld to the ATO through your activity statement
• prepare payment summaries and lodge your annual report
• keep PAYG withholding records.

Volunteer – definition

There is no legal definition of ‘volunteer’ for tax purposes. A dictionary definition of a volunteer is someone who enters into any service of their own free will, or who offers to perform a service or undertaking.

A genuine volunteer does not work under a contractual obligation for remuneration and would not be an employee or independent contractor.

ATO Webinar, Thursday 20 August 2015: TB12 Tax basics for small business – issues for contractors

The ATO hosts a series of webinars to assist contractors in determining if they are an employee or a contractor. The webinar addresses some of the commonly asked questions around employee versus contractor, as well as other issues relevant to contractors, such as personal services income.

The next webinar is scheduled for 20 August 2015 at 2:45 pm.

To register for the webinar, please visit the ATO website.