Tag: nexzen accounting

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.

Meeting your tax obligations each year is important. One area of taxation that often confuses support providers is what does—and does not—count as an eligible tax deduction?

But first—what’s a tax deduction?

Tax deductions are claims for expenses directly tied to the business that business owners can list on their return.Tax deductions reduce your amount of taxable income, boosting your refund at the end of the year.A tax deduction can include any work-related expense, such as the cost of uniforms, tools used in your practice, and any work-related travel.

Are there rules for claiming tax deductions?

Let’s start with the basics. To claim any deduction on your return, you must adhere to the Australian Taxation Office’s (ATO) three rules:

1. The claim must be for an expense directly tied to your business, not for a private expense.
2. For expense claims that are both business and private, you may only claim the business portion.
3. You must have a record of the expense.

Support providers often miss out on deductions—or claim items that don’t meet the above parameters—simply because they don’t understand which deductions are allowed.

12 Common Deductions for Support Providers

NexZen Accounting has created this list of the 12 most common deductions for support providers (based on this list from the ATO) to help you with your tax preparation this year:

• Vehicle expense
• Home-based business expense
• Travel expense for business
• Worker salary, wage, and super contribution expense
• Repair, maintenance, and replacement expense
• Working expense
• Asset depreciation and capital expense
• Consumables expenses
• Work-from-home expenses
• Mobile and internet expenses
• Computer, laptop, and office equipment expenses
• Tax accounting professional services

Let’s take a closer look at these allowable expenses.

Vehicle expenses

If you must drive your car for work, you can claim a deduction.You cannot claim the vehicle expense deduction for your necessary trips from home to work and back.

• Home-based business expense
• If you carry out some or all business activities from home, you might be allowed to claim:
• Occupancy expense, such as mortgage, rent, land tax, and council rates
• Running expense, such as phone, electricity, furniture, furniture repairs, and cleaning
• Motor vehicle trips from your home to other places as long as the trip is business-related
• Work-related travel

In addition to your vehicle expenses, you may also have work-related travel expenses. These can include toll charges, airfare, bus passes, or meals when you’re traveling for work and staying overnight.You can claim travel from the home of one client to another, and sometimes you can also claim travel for work-related activities with a client, such as appointments.You may also be able to claim meals that you have with clients when traveling.

Worker salary, wage, and super contribution expense

Because you own a business, you can typically claim deductions for:

• Employee salary and wage compensation
• Super contributions into a compliant super fund or RSA for employees and some contractors.

These are also typical operating expenses.If you run your business as a sole trader, you can also claim your own contributions on your personal return.

Repair, maintenance, and replacement expense

Deductions for repair, maintenance, or replacement expenses are allowed as long as: The amount was used to replace machinery, tools, or a physical premises used to produce your business income. Claims cannot be for amounts considered capital expenses.

Working expense

These are expenses that occur in the everyday operation of your business. Such expenses could include:

• Company stationery
• Building rent
• Stock purchases

These are also sometimes referred to as operating expenses.Most operating expenses must be claimed in the income year in which you incurred them, and only the business-related portion can be claimed. For operating expenses that are both business and private, such as mobile calls, you can only deduct the business portion.

Asset depreciation and capital expenses

Capital expense deductions are generally claimed over time. You might be allowed to use an instant write-off, which lets you claim a deduction for the entire purchase cost in the financial year you bought the asset and used it. Capital expenses are either:

• Depreciating assets, including the purchase amount and the amount you incurred from its transport or installation
• The cost of improving your business

You must keep complete and accurate records of all expense deductions you wish to claim. Other allowable expenses include:

Consumable supplies

As a support provider, you probably pay for supplies that help you in your day-to-day job. Such supplies, or consumables, can include stationery, hand sanitiser, sunscreen, or printing paper.

Work-from-home expenses

It’s typical for support providers to perform some of their tasks from home. This can include such tasks as submitting timesheets, client activity research, phone calls, and emails.You can claim deductions for the time you spend working at home for such expenses as electric, air conditioning, or heating.If you also have a dedicated office space within your home, such as a spare room you use as an office only, you can enjoy an increased deduction. Beginning with the 2019-2020 financial year, you can claim a home office deduction even if you don’t have a dedicated office space. To claim the deduction, estimate how many hours you worked from your home office and multiply by the relevant rate for the year.

Mobile and internet expenses

Support providers typically use a mobile phone during the workday for work-related purposes. You probably also have a computer at home that’s connected to the internet. You probably use these devices to connect with clients or to organize your calendar. Any work-related usage of these devices is eligible for a deduction. If you also use these devices for non-work-related activities, you can only deduct the business-related portion.

Computer, laptop, and office equipment

Besides deducting your mobile and internet expenses, you might also be allowed to claim the purchase price of the phone or computer. If you work as a sole trader, you can deduct the entire purchase price of any mobiles or computers purchased during a financial year.

Tax accounting professional services

Some support providers use professional tax accountants like nexZen to prepare and send in their tax returns to the ATO. You can claim any amounts you pay to your tax accounting service in the tax year in which you paid it.

What expenses can you not claim as a deduction?

Some expenses generated during the course of business are not considered business-related. Some of the expenses that you cannot claim include:

• Entertainment
• Traffic fines
• Private expenses, such as childcare or family clothing
• Earned income expenses that aren’t assessable, such as hobby income
• GST on purchases that can be claimed as GST credits on your activity statement

Also, if you earn personal services income, there may be limits on deductions. nexZen Accounting Firm helps support providers around Australia with all their accounting needs—and we can help you, too. Reach out to the team today.

The early days of business are difficult, and the questions are endless. Where should I rent an office? Which business structure should I choose? How will I pay my bills? Where can I find startup capital? Should I hire employees? If you’re struggling with the sheer enormity and number of decisions you’re facing these days, please don’t stress. Every business owner goes through this process, and “decision fatigue” is a real problem for most people.

First, let’s consider one of the bigger, more pressing questions at the moment: Which business structure should I choose? There are technically seven different types of business structures in Australia. Some of these are more popular than others, and you probably have random advice about which one is best.

Your friends may say, “Pick a trust. My sister’s brother’s wife has a trust, and she says it’s the way to go.” You may feel drawn towards the simplest option, which is a sole trader. Perhaps you’re most interested in saving money on taxes, and you’re wondering which business structure offers the most tax benefits. In most cases, business owners are primarily concerned with protecting their assets and making sure they’re compliant.

Feeling overwhelmed yet? That’s okay. We’re here to help and walk you through the process.

Types of Business Structures in Australia

First, let’s look at all the different types of business structures in Australia. These are basic overviews, but you can find a more detailed definition in our Business Structure eBook.

Sole Trader

This is the simplest, most straightforward business structure. If you’re working alone (without a partner or other entity), you’re a sole trader. It’s easy to keep records as a sole trader, but you may pay higher taxes, and your assets aren’t protected.

Company

You can also incorporate your business as a company, which is considered an individual entity. That means the company is responsible for taxes, financial reporting, and liability. This structure is the most complex as far as setup and expenses are concerned, but the advantages may be worth it.

Partnership

If you run the business with another person (or multiple people), you can form a partnership. This entity works a lot like a sole trader, but expenses and income are split between partners. All partners are responsible for taxes and liabilities. A partnership is fairly inexpensive and simple to set up.

Trust

A trust is similar to a company, but your business isn’t incorporated or a separate entity. Instead, the trust accumulates income from the business, which is then passed on to the trust’s benefactors. The trustees may be either individuals or corporations. Taxes and other liabilities also fall to the benefactors. This is one of the best structures for low tax rates, but it’s a more complicated and expensive setup process.

How to Choose a Business Structure

When you’re choosing a business structure, you can ask yourself these questions to find the best option. Better yet, you can partner with nexZen to gain better clarity and direction.

What are the roles of each owner or partner? How will you handle profit and income?

These two questions generally go hand in hand. Usually, the person who contributes the most to the business also receives the most profit or income. If you’re working with another person to start your business, you’ll need to discuss each owner’s role, tasks, responsibilities, and financial contributions. You’ll also need to decide how to handle expenses and revenue in the future.

How will you handle distributions? Will you have shareholders?

Distributions are payments made to owners or shareholders of a company. The business structure you choose determines how you’re allowed to make these distributions.

Who should pay taxes? How will income flow through the business? How important is your effective tax rate?

Your business structure also determines how income flows through your business, who pays taxes on the income, and which tax rate applies. For example, sole traders receive all of the income from the business and pay their effective personal tax rate on the income. In certain situations, you may also allocate franking credits to shareholders to avoid double taxation. This only applies to companies with shareholders, however.

Do you need limited liability or asset protection?

Only certain business structures limit the owner’s personal liability. If you choose a structure that doesn’t limit liability, you will probably need another form of protection for your personal assets.

How should owners exit the business?

At some point, one or more owners may choose to end their role with the business. One person may wish to “buy out” all the other owners, an owner may wish to start another business, etc. The business structure you choose now will affect this decision. Some structures are easier to leave than others.

Final Thoughts

Choosing a business structure is arguably the biggest decision you will make for your business. The ideal choice differs from one business to the next, so it’s important to ask yourself thoughtful questions and commit some time to the decision-making process. Taxes, personal liability, income flow, and exiting the business all seem like future problems, but they will eventually become a reality. You can avoid future stress, hassle, and expense by making the best decision now. Of course, most business owners could use a little help in this area. Business structure likely isn’t your area of expertise. However, it is our area of expertise. If you’re feeling overwhelmed or discouraged or simply need a little guidance, nexZen is here. We can walk you through the process and help find the perfect business structure. We’ll assist with the paperwork too. Connect with nexZen to find answers to all of your business structure questions and more.