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To determine if your worker is an employee or contractor you will need to assess the totality of the relationship with the worker, having regard only to the legal rights and obligations arising from the contract you entered into with your worker.
Contracts may be:
written or oral, or
a hybrid combination of:
written terms
oral terms, and/or
terms implied from conduct.
Your contract may also be varied based on you or your worker’s conduct. Any label which you and the worker use in your contract to describe your relationship, such as ”independent contractor”, will not determine or be relevant to how your relationship is characterised.
Critical differences between employees and contractors
Employees work in and are part of your business. They perform their work as representatives of your business.
Contractors provide services to your business and perform work to further their own businesses.
A contractor will typically:
be paid for hours worked, or for results achieved, or for a combination of both
provide materials, tools and equipment necessary to complete the work
be free to delegate work to other entities
have substantial freedom in the way the work is done
provide similar services to the general public, including other businesses
be free to accept or refuse the work offered
make a profit or loss
incur significant costs of running a business, and
bear the entrepreneurial risks associated with running a business.
If most of these factors are absent in the contract with the worker, then they may be treated as an employee under common law.
All wages paid by businesses to employees are liable for payroll tax.
When do employment agency provisions apply?
If you enter a contract or an arrangement with a client to procure workers to work in and for the conduct of that client’s business, you may be an employment agent and:
all wages you pay the relevant on-hired workers are liable for payroll tax, and
the contractor provisions and the contractor exemptions do not apply.
The employment agency is liable for payroll tax on the wages it pays the workers.
Read the employment agencies page to help you determine if you are an employment agent.
Need more detailed information?
Commissioner's Practice Note 007 – Payroll tax contractors helps businesses decide whether payments made to independent contractors are liable for, or exempt from, payroll tax and whether the amounts should
be included in their payroll tax returns.
If no exemption applies to payments made to a contractor, the taxable component of the payments are liable for payroll tax and must be included in your taxable wages.
Taxable component
Only the amounts paid by a deemed employer to a contractor in relation to the performance of work under a relevant contract are liable for payroll tax. This is known as the labour component.
Non-labour components are not liable for payroll tax. Examples include:
materials
tools
equipment, or
a vehicle.
The Goods and Services Tax (GST) component of payments made to contractors is not liable for payroll tax.
Calculating non-labour components
Where the contract or invoice separately identifies the labour and non-labour components of amounts paid to the contractor, you may deduct the amount attributed to the non-labour components provided they reflect reasonable market rates.
If the contract or invoice does not distinguish between the amounts payable for labour and non-labour components, you may deduct a proportion of the total payments based on the relevant profession or trade as specified in Revenue Ruling PTA 018 – Contractor deductions.
You cannot claim general business expenses not specifically related to the work under the contract as non-labour deductions. Examples include:
maintaining an office
general accounting expenses, or
insurance expenses.
Need more detailed information?
Revenue Ruling PTA 018 – Contractor deductions sets out those deductions for materials and equipment for certain types of contractors and outlines the way new deductions may be granted.
Contact us for a decision if the contractor’s trade is not listed in the Ruling or you believe a higher deduction should apply.
Errors may result in the underpayment of payroll tax, which is also known as a tax default.
Interest will be imposed on any underpayments. Your business may also be liable for penalty tax. Read the interest and penalty tax page for more details.
Record keeping
Always maintain relevant records showing how your contractor payments were calculated. Records must be:
retained for at least 5 years
sufficient for a payroll tax liability to be properly assessed
in English, or a form easily translated to English, and
readily available to us if requested, for example as part of a payroll tax audit.
If you are claiming a contractor exemption you will need to keep supporting evidence that is relevant to the exemption. This may include, but is not limited to:
the contractor’s ABN
written contracts and agreements
invoices
the dates and total days the contractor provided you with services
details of the contractor’s workers who attended the site where and when the work was performed, and
information showing that a contractor provides similar services to the public, including:
advertising material
website information, and/or
any declaration from the contractors that they provide similar services to other customers.
Payroll tax audits often uncover errors caused by misunderstandings of how the contractor provisions apply. These include:
Businesses failing to realise that the employment agency provisions apply to their situation (with the consequence that contractor exemptions do not apply).
Businesses failing to consider if the worker should properly be characterised as an employee rather than a contractor.
Incorrectly assuming that since the worker has an ABN or operates through a company that it automatically means they are not subject to payroll tax. The contractor provisions can apply to these types of workers.
Misunderstanding how the contractor exemptions operate and apply. It is important to understand the differences between the exemptions and their relevant criteria.
Errors by industry
Certain industries frequently engage workers through contracts and employment agencies. Businesses in these industries often make errors when calculating their taxable wages. For more details, visit the following industry pages:
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your monthly and/or annual returns, including previous financial years.
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. Interest will still be imposed.
Non-compliance identified through our data matching activities will result in penalty tax and interest charges, in addition to any underpayments detected.
Revenue NSW uses information from the ATO and other government agencies to assess the amount of liable contractor payments businesses have declared in their payroll tax returns.
If a review of your payments to contractors occurs during an audit, the following review process will usually apply. Open the headings below for more details.
We may also review the nature of your business and how workers are engaged to determine if they are employees or contractors, or if the employment agency provisions apply.
This may involve a review of your written agreements and contracts to understand the relationships.
If you do not obtain this declaration you may be liable for any unpaid payroll tax liability of the contractor.
You are still liable for your own payroll tax on the payments you make to the contractor unless one of the contractor exemptions apply, even if you obtain a contractor’s declaration.
Anti-avoidance provisions
The payroll tax anti-avoidance provisions apply where an arrangement reduces or avoids liability for payroll tax.
There does not need to be proof the arrangement was intentional. What matters is the effect the arrangement has on the payroll tax liability.
We examine the facts and circumstances of your business to work out whether to apply the provisions.
The Chief Commissioner may disregard the agreement, transaction or arrangements and determine that any:
party to the arrangement is taken to be an employer, and/or
payment in respect of the arrangement will be deemed taxable wages.
