ABN Sole Traders, are you a contractor or employee?

We get asked this question quite often so I wanted to write a short post to help anyone out there who is confused about the difference between PAYG, ABN and PTY LTD and clarify the difference for you in terms of Tax obligations.

PAYG: Standard employee arrangement. Either as a permanent employee or temp where you submit timesheets and get paid regularly, Super is paid quarterly and tax is deducted every pay. You can then claim once a year when you do your tax return.

PTY LTD: Some long term contractors invest in creating a company to contract through. This comes at extra costs and admin overhead but it can have some tax benefits if you are a career contractor. Probably not worth the hassle for shorter-term contracts.

And here is the curly one… ABN Sole Traders

Do you have an ABN and want to do some contract work? Are you an employer looking to engage an ABN contractor?

There are some pretty strict guidelines set out by the ATO regarding ABN Sole Traders so hopefully, this information will help you be compliant and prevent you from getting into hot water with the ATO.

We often get asked the question by contractors that have an ABN and are a Sole Trader why we still have to withhold their tax and pay their Super ourselves.

The simple answer is that ABN Sole Traders that do 9-5 type work are effectively seen as employees in the eyes of the tax office. If you are doing regular work during regular hours and getting paid a regular (daily or hourly rate) then you are not doing ‘contract’ work.

ATO TOOLS

Employee or contractor decision tool: https://t.ly/e9mVk (are you really a contractor?)

Employer tax and super obligations: https://t.ly/WjB7v (if the decision tool decides someone is an employee then it’s against the law to treat them as a contractor)

If your engagement came up as an employee classification. You can still probably claim more via your ABN but it looks like legally your employer will have to treat you as an employee and withhold tax.

The ATO is getting smarter and smarter these days with their Machine Learning and AI and you want to make sure that you can continue contracting and engaging contractors without exposing yourself.

Hope this helps 🙂

Bart

Start the conversation with the best IT recruitment consultants in Melbourne, Canberra, Adelaide and Brisbane by emailing office@redwolfrosch.com.au or calling 1300 544 652.

Note: I’m not an accountant so this should not be taken as financial advice.