Contractors bring with them different obligations that business owners need to comply with. Employers that incorrectly classify employees and contractors can face hefty penalties and charges as well as claims for entitlements and superannuation contributions. It must be established whether they are employees or contractors to get tax and super requirements right.
When hiring an individual contractor, the contractor may wish to enter a voluntary agreement for owners to deduct PAYG withholding amounts from their payments. This arrangement helps the contractor manage their tax by making contributions towards their expected income tax liability. Employers will need to check whether a contractor is eligible for super guarantee and if they can choose a super fund. If so, employers will need to;
- Give the contractor a Standard choice form (or equivalent) within 28 days of them starting, so they can nominate their preferred super fund.
- Check that the fund they’ve nominated is a complying fund.
- Give their tax file number to their super fund the next time you make a payment for them, or within 14 days, whichever is the later.
- Set up an electronic system to report and pay your super contributions using SuperStream.
Employers should also promptly start keeping records about the contractor as they will be needed to meet tax and super obligations.
Business owners will generally need to withhold 47% (from 1 July 2017) from payments to contractors that are a company, partnership or trust, and do not provide an ABN. Employers are also required to give a completed “PAYG payment summary – withholding where ABN not quoted” to the contractor with their net payment, include the payments in the “PAYG withholding where ABN not quoted – annual report” and lodge the report with the ATO by 31 October.
Business owners will need to meet other obligations when employing contractors such as preventing unlawful discrimination in the workplace as well as supporting working parents, people with a disability and those with carers responsibilities.