Becoming an Independent Contractor

How do I know if I'm an independent contractor?

Simply put, independent contractors run their own business by hiring out their services to companies. Independent contractors can work for several clients at a time, and can negotiate their own pay each time unlike employees, who are employed by one firm and typically paid by the hour for a set number of hours.

Additionally, you may be considered an independent contractor if you:

  • Provide most if not all of the resources needed (equipment and materials) to do your work.
  • Are able to farm out work to other people.
  • Offer services to other companies.
  • Are able to accept or refuse work.
  • Are compensated for attaining results.
  • Are in a position to make a profit or loss.
  • Have control in how you work.

Take note that having your own Australian Business Number doesn't necessarily make you an independent contractor.

Unlike independent contractors, employees are entitled to certain conditions mandated by law. These include the following:

  • Payment of salary.
  • Rights to taking days off.
  • Fixed hours of work.

What are my entitlements?

As an independent contractor, your entitlements are different compared to employees.

  • Superannuation
    Some contractors have superannuation privileges, but this depends on the contractor's agreement with the employer. If you do not get super contributions, you may always choose to setup your own.
  • Leave and redundancy
    Independent contractors do not have leave privileges (e.g. annual leave, sick leave) and redundancy entitlements (e.g. redundancy pay), unless specified in the contractor's agreement. Independent contractors also need to negotiate their salaries.
  • Workers' compensation insurance
    Workers' compensation is a type of insurance that provides wage replacement and medical benefits to employees injured during employment. Independent contractors do not have this privilege, unless they have their own accident protection insurance in place.
  • Occupational safety and health
    As an independent contractor, you are entitled to a safe and healthy workplace. You are also required to follow the duties specified in the Occupational Health & Safety (OH&S) Act of your state or territory.

What are my tax obligations?

Independent contractors have special tax rules that govern them. Should you decide to be one, you will have to pay your own taxes. Here are some of your tax obligations as an independent contractor.

  • Australian Business Number
    As an independent contractor, you really need to have your own ABN when dealing with other companies. If you don't have your own ABN, your hirer may legally withhold a whopping 45.6 per cent of any payments made to you, including Medicare charges. You may be able to get back the excess in your tax return, but this isn't good for your cash flow.
  • Tax File Number
    A TFN is an 8 or 9-digit number issued by the Australian Taxation Office to each taxpayer for administering tax. Remember: if you're part of a partnership or registered company, you have to apply for your own separate TFN. If you're a sole proprietor, you have to use your own TFN in your dealings.
  • Personal Services Income
    If you're a sole proprietor, you have a right to claim certain expenses as tax deductions. As a result, rules on the PSI could affect the deductions you can claim.

    If you're in a partnership, the company can claim certain expenses as tax deductions. Each partner should pay tax based on net income. The PSI could influence the sharing of income and expenses among partners.

    If you operate as a company or trust, the PSI rules would affect you in areas including dividing income, and keeping income in the company.
  • Goods and Services Tax
    The GST is said to apply to most goods and services consumed or sold in the country. As a result, your service will most likely be subject to it.
  • Payroll tax
    Payroll tax is a state tax on the salary paid to employees. Certain payroll tax laws define wages to encompass payments given to independent contractors. Hirers need to consult with their state or territory's revenue office to verify whether payments are considered wages subject to payroll tax.
  • Voluntary withholding tax arrangement
    If you wish, you may set up a voluntary agreement that will allow your hirer to withhold tax for you as an employer would. This could simplify the management of your taxes. You may approach the ATO for more information.