Should I Hire an Employee or a Contractor?

Share on facebook
Share on google
Share on linkedin

At some point, every successful small business owner needs to expand the team. Choosing the right person is essential, but first you must decide whether to hire a contractor or an employee.
There are benefits with both options, but there are also downsides to consider. The choice you make could possibly affect your business long-term, so let’s take a moment to review your options. Employee vs. contractor: which one is best for your business?

What Is an Employee?

First, let’s cover the basics: What is an employee?

An employee is part of your organisation. They not only provide services or work for your business; they are part of the team. In Australia, law requires organisations to pay employees on a fixed, regular basis and provide paid leave. There are also different tax laws and superannuation laws for employees vs. contractors.

What Is a Contractor?

Unlike employees, contractors are not actually part of your organisation. Contractors are actually their own entity, and they sell their services to other organisations. Some contractors may not consider themselves business owners, but the distinction is still there. Contractors should also have their own Australian Business Number (ABN).

Contractors are also called independent contractors or subcontractors. They usually have their own work requirements and guidelines they set themselves. This means they may set their own work hours, use their own tools and follow their own methods to perform their services. They may also set their own fees and work for more than one organisation at once.

While contractors have certain legal rights, they are usually responsible for their own taxes, insurance, superannuation and other benefits.

Employee vs. Contractor: Pros and Cons

At one point, “employee” was the default work status. If an organisation needed to expand its workforce, they simply hired an employee. Today, though, more and more businesses are choosing contractors. In fact, research shows that over one-third of Australians work as contractors. That doesn’t even include people who work as contractors in addition to full-time employment. If you choose to hire a contractor vs. an employee, you may have plenty of options. However, there are pros and cons to consider first.

Contractor Pros

A Contractor May Be the Cheaper Option

Though contractors often charge more per hour than a salary or wage employee, the overall cost is often less expensive. You can pay a contractor as-needed and you won’t need to pay for taxes or benefits.

A Contractor May Give You Flexibility

As mentioned above, you can hire contractors when you need them. If your practice is short-staffed or experiencing a sudden rush of patients, hire a few contractors to get you through the period. When things slow down again, reduce your workforce with minimal hassle.

A Contractor May Provide Services You Can’t Find Elsewhere

Employees often need training. Most employees work for one organisation for years before moving to another. Contractors, however, usually work for multiple clients at once and they gain a lot more experience. Most contractors can start work immediately with little training and may provide additional services or specific knowledge you can’t find elsewhere.

A Contractor Requires Little Oversight

In the early days, employees often require extensive management until they become familiar with the job. Contractors are professionals who usually require little training. This frees up your time for other tasks.

Contractor Cons

A Contractor May Not Feel Loyal to Your Organisation

Contractors primarily work for themselves. Though you can certainly build a relationship with a contractor, that takes time. They likely won’t feel immediate loyalty or dedication to your practice.

A Contractor Is Their Own Authority

While you may provide guidance, limitations and deadlines for their services, contractors answer primarily to themselves. You may not like the way they do things, the schedule they set for themselves or their communication styles.

Employee Pros

Employees Become Part of Your Team

While contractors work for themselves, employees are part of your team. If you want to build a workforce of reliable, dedicated team members, employees are the better option.

Employees May Be There When You Need Them

Most employees are ready when you need them. If you suddenly find yourself with a large workload or too many employees call out, a full team of staff helps you find someone ASAP. A contractor may take a bit more time to find.

Employees Are Familiar With Your Practices

Employees require a bit more training, but they are also more familiar with your organisation. They know and understand your processes and how your practice operates.

Employees May Be More Loyal

When it comes to privacy, dedication and teamwork, employees often have the upper hand over contractors. Working for you is their primary job and they are more likely to protect your information and be there when you need them.

Employee Cons

Employees May Be the More Expensive Option

Employees cost much more than an hourly wage or salary. They also require taxes, insurance, superannuation and paid leave. Your employees will need their own tools and equipment to perform their duties and you may spend more on training and management as well. The expenses add up and are a large consideration for most small business owners.

You May Be “Stuck” With a Bad Employee

Not all employees are loyal, dedicated and capable. If you hire someone who doesn’t meet your needs, it’s much harder to terminate the relationship.

Should You Hire an Employee or a Contractor?

Now that you know the pros and cons of employees and contractors, it’s time to decide which options is best for your organisation. Here’s a quick checklist to help you make the decision.

  1. First, decide whether you need a team member who can work set hours. If the work requires set hours, you’ll need to hire an employee to stay compliant with labour laws.
  2. If hours are flexible, think about whether you have the resources to hire an employee at this time. If you’re not sure whether your business can support all the costs of hiring an employee, a contractor may be the better option.
  3. If you have the resources and hours are flexible, look through the remaining factors and decide which option better fits your needs. Do you value the flexibility and experience a contractor can offer or do you need the dedication and loyalty of an employee? There’s no right or wrong answer, but this simple process can help you make a decision.
  4. Finally, before you make a final decision, read through the tax and super obligations from the Australian Taxation Office. You can also read through the Fair Work Ombudsman’s guide for independent contracting.
Final Thoughts

If you’ve read through this guide, completed the checklist and still have questions regarding hiring an employee vs. a contractor, please let us know. The experts at nexZen are here to help. We assist small practices just like yours with business strategy and compliance concerns. Get in touch to get started.

We want to hear from you

This is a loser that most people are probably pretty happy about — the government is extending a task force that targets tax avoidance by multinationals, large public and private groups, trusts and wealthy individuals.

It is giving the Australian Tax Office (ATO) more than $600 million over the next three years to keep the scrutiny on those groups.

The budget forecasts the extension of the task force will make the government $2.1 billion in revenue from tax over the next four years.

From

2022-23 income year

Normally, GST and PAYG instalment amounts are adjusted using a GDP adjustment or uplift. For the 2022-23 income year, the Government is setting this uplift factor at 2% instead of the 10% that would have applied. 

The 2% uplift rate will apply to small to medium enterprises eligible to use the relevant instalment methods for instalments for the 2022-23 income year and are due after the amending legislation comes into effect:

  • Up to $10 million annual aggregated turnover for GST instalments and 
  • $50 million annual aggregated turnover for PAYG instalments 

Get an offer now..!!

From12.01am 30 March 2022

There are a few jokes going around social media about the price of fuel.

As widely predicted, the Government will temporarily reduce the excise and excise-equivalent customs duty rate that applies to petrol and diesel by 50% for 6 months from Budget night. That is, the current 44.2 cents per litre excise rate will reduce to 22.1 cents per litre from Budget night. However, the measure is subject to the passage of the enabling legislation so don’t expect to see a change right away. 

 The reduction extends to all other fuel and petroleum based products except aviation fuels.

At the conclusion of the 6 months on 28 September 2022, the excise and excise-equivalent customs duty rates revert to previous rates including any indexation that would have applied during the 6 month period. 

The Australian Competition and Consumer Commission (ACCC) will monitor the price behaviour of retailers to ensure that the lower excise rate is passed on to consumers.

The measure comes at a cost of $5.6bn.

From

1 July 2021 to 30 June 2022

The low and middle income tax offset (LMITO) currently provides a reduction in tax of up to $1,080 for individuals with a taxable income of up to $126,000.

The tax offset is triggered when a taxpayer lodges their 2021-22 tax return.

For the 2021-22, the LMITO will be increased by $420 which means that the proposed new rates for individuals are as follows:

 

Taxable income 

Offset 

$37,000 or less 

$675

Between $37,001 and $48,000 

$675 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,500

Between $48,001 and $90,000 

$1,500

Between $90,001 and $126,000 

$1,500 minus 3 cents for every dollar of the amount above $90,000 

From

April 2022

A one-off $250 ‘cost of living payment’ will be provided to Australian resident recipients of the following payments and concession card holders:

  • Age Pension 
  • Disability Support Pension 
  • Parenting Payment 
  • Carer Payment 
  • Carer Allowance (if not in receipt of a primary income support payment) 
  • Jobseeker Payment 
  • Youth Allowance 
  • Austudy and Abstudy Living Allowance 
  • Double Orphan Pension 
  • Special Benefit 
  • Farm Household Allowance 
  • Pensioner Concession Card (PCC) holders 
  • Commonwealth Seniors Health Card holders 
  • Eligible Veterans’ Affairs payment recipients and Veteran Gold card holders.

    The payments are exempt from taxation and will not count as income support for the purposes of any income support payment. An individual can only receive one payment.

The Home Guarantee Scheme guarantees part of an eligible buyer’s home loan, enabling people to buy a home with a smaller deposit and without the need for lenders mortgage insurance. The Government has extended two existing guarantees and introduced a new regional scheme.

Just prior to the Budget, the Government announced:

  • First Home Guarantee – from 1 July 2022, an increase from 10,000 to 35,000 guarantees to support eligible first homebuyers to purchase a new or existing home. 
  • Single parent Family Home Guarantee – 5,000 guarantees each year from 1 July 2022 to 30 June 2025. The family home guarantee supports eligible single parents with children to buy their first home or to re-enter the housing market with a deposit of as little as 2%.
  • Introduction of a Regional Home Guarantee. This guarantee will support eligible citizens and permanent residents who have not owed a home for 5 years (including non-first home buyers) to purchase or construct a new home in regional areas with a minimum 5% deposit areas (subject to the passage of enabling legislation).

From

1 July 2021

The Medicare levy low income thresholds for seniors and pensioners, families and singles will increase from 1 July 2021.

 

2020-21 

2021-22 

Singles 

$23,226 

$23,365

Family threshold 

$39,167 

$39,402

Single seniors and pensioners 

$36,705 

$36,925

Family threshold for seniors and pensioners 

$51,094 

$51,401

 
For each dependent child or student, the family income thresholds increase by a further $3,619 instead of the previous amount of $3,597. 

From

1 July 2024


Trust and beneficiary income reporting and processing will be digitalised with all trusts being provided with the option of lodging income tax returns electronically.

While this measure will reduce compliance costs, it will also increase transparency and provide the ATO with a greater insight into where anomalies are occurring.

The temporary 50% reduction in superannuation minimum drawdown requirements for account-based pensions and similar products has been extended to 30 June 2023. 


Minimum superannuation drawdown rates 2019-2023

Age 

Default minimum drawdown rates (%) 

Reduced rates by 50% for the 2019-20 to 2022-23 income years (%) 

Under 65 

65-74 

2.5 

75-79 

80-84 

3.5 

85-89 

4.5 

90-94 

11 

5.5 

95 or more 

14 

 

From 7:30pm AEDT, 29 March 2022 until 30 June 2023
The Government intends to provide a 120% tax deduction for expenditure incurred by small businesses on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cyber security systems or subscriptions to cloud based services. The technology boost will be available to small business with an aggregated annual turnover of less than $50 million.An annual expenditure cap of $100,000 will apply to the boost. The boost for eligible expenditure incurred by 30 June 2022 will be claimed in tax returns for the following income year. The boost for eligible expenditure incurred between 1 July 2022 and 30 June 2023 will be included in the income year in which the expenditure is incurred. That is, the additional deduction available under this measure is expected to be claimed in the 2023 tax return.  

From

1 January 2024

As announced prior to the Budget, companies will be able to choose to have their pay as you go (PAYG) instalments calculated using current financial performance, extracted from business accounting software, with some tax adjustments. 
The move is intended to ensure that instalment liabilities are aligned to the businesses cashflow. In addition, the digitisation of PAYG instalments will improve transparency and provide more accurate data on performance. 

In bad news for people’s pay packets, real wages are not forecast to grow until later this year at the earliest thanks to higher-than-expected inflation.

At the end of last year, Treasury predicted the inflation rate would be 2.75 per cent. The reality has ended up being around 4.25 per cent.

The budget is predicting wages will only be just higher than inflation in the next couple of years, meaning cost of living pressures are unlikely to ease any time soon.

Despite current price hikes, the budget is forecasting inflation will taper off and wages will grow faster by the middle of the decade.

From

1 January 2024

As announced prior to the Budget, businesses will be able to report Taxable Payments Reporting System data via their accounting software on the same lodgment cycle as their activity statements.
The measure is expected to reduce the costs of complying with the system and increase transparency.

The measure that enables payments from certain state and territory COVID-19 business support programs to be treated as non-assessable non-exempt (NANE) income has already been extended until 30 June 2022. 
The Government has announced that the following state and territory grant programs have been made eligible for this treatment since the 2021-22 MYEFO, although it is not clear whether the relevant legislative instruments have been issued as yet:

  • New South Wales Accommodation Support Grant 
  • New South Wales Commercial Landlord Hardship Grant 
  • New South Wales Performing Arts Relaunch Package 
  • New South Wales Festival Relaunch Package 
  • New South Wales 2022 Small Business Support Program 
  • Queensland 2021 COVID 19 Business Support Grant 
  • South Australia COVID 19 Tourism and Hospitality Support Grant 
  • South Australia COVID 19 Business Hardship Grant.

    This builds on the list of existing grants paid by New South Wales and Victoria that can already qualify for NANE income treatment. 

As announced prior to the Budget, the Government will commit $6.6 million for the development of IT infrastructure that will enable the ATO to share Single Touch Payroll (STP) data with State and Territory Revenue Offices on an ongoing basis. 

The funding will be deployed following further consideration of which states and territories are able and willing to make investments in their own systems and administrative processes to pre-fill payroll tax returns with STP data in order to reduce compliance costs for businesses.

From

1 July 2022

Back in the 2019-20 Budget, the Government announced that Australian Business Number (ABN) holders would be stripped of their ABNs if they failed to lodge their income tax return. In addition, ABN holders would be required to annually confirm the accuracy of their details on the Australian Business Register.


This measure has been deferred for 12 months, which means that the tax return lodgement obligation is due to commence from 1 July 2022 with the annual confirmation of ABN details to commence from 1 July 2023.

From

1 July 2021

As previously announced, workrelated COVID19 test expenses incurred by individuals will be made tax deductible. 
Changes will also be made to ensure that FBT will not be payable by employers if they provide fringe benefits relating to COVID19 testing to their employees for workrelated purposes.
The changes for deductions will be effective from 1 July 2021, with the FBT changes to apply from 1 April 2021.
At this stage it is not entirely clear whether the deduction rules will cover expenses incurred where the employee is able to work from home. The initial media release indicates that the measure will cover situations where the individual has the option of working remotely, while the Budget only refers to costs of taking a COVID-19 test to attend a place of work but doesn’t specifically refer to employees who can work from home.

From

7:30pm AEDT, 29 March 2022 until 30 June 2024

The Government intends to provide a 120% tax deduction for expenditure incurred by small businesses on external training courses provided to employees. The deduction will be available to small business with an aggregated annual turnover of less than $50 million. External training courses will need to be provided to employees in Australia or online, and delivered by entities registered in Australia.
Some exclusions will apply, such as for in-house or on-the-job training and expenditure on external training courses for persons other than employees.
We assume there will need to be a nexus between the employee’s employment and the training program undertaken for the boost, although we are waiting on further details of this initiative to be released. 
The boost for eligible expenditure incurred by 30 June 2022 will be claimed in the tax return for the following income year (that is, the 2023 tax return). The boost for eligible expenditure incurred between 1 July 2022 and 30 June 2024, will be included in the income year in which the expenditure is incurred.

Just prior to the Federal Budget, the Government announced the extension of the:

  • Boosting Apprenticeship Commencements wage subsidy, and
  • Completing Apprenticeship Commencement wage subsidy.

    Any employer (or Group Training Organisation) who takes on an apprentice or trainee up until 30 June 2022 can gain access to:
  • 50% of the eligible Australian Apprentice’s wages in the first year, capped at a maximum payment value of $7,000 per quarter per Australian Apprentice,
  • 10% of the eligible Australian Apprentice’s wages in the second year, capped at a maximum payment value of $1,500 per quarter per Australian Apprentice, and
  • 5% of the eligible Australian Apprentice’s wages in the third year, capped at a maximum payment value of $750 per quarter per Australian Apprentice.

An additional $652.6m has been set aside to extend the ATO’s Tax Avoidance Taskforce by 2 years to 30 June 2025.
In that time, the taskforce is expected to increase receipts by $2.1bn and increase payments by $652.6m.

Buried under the wildly exciting headline of Commonwealth’s Deregulation Agenda, is the $19.9 million spend by the Australian Bureau of Statistics to develop a new reporting application to enable businesses to submit surveys on business indicators directly through their accounting software. Excellent. Real time reporting utilising verified data on the state of Australian business. Guarantee of Origin scheme, and the development of a Biodiversity Stewardship Trading Platform to support farmers to undertake biodiversity activities ahead of the introduction of a voluntary biodiversity stewardship market.

Another $148.6m is for the development of community microgrids and just over $50m to develop gas infrastructure projects.

Enter Details to download pdf