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Do I employ or use a contractor? It's a toughie

Updated: May 19, 2023

To hire or not to hire? That is the question, and what a golden question it is. The answer is different for every single person/biz so let's go down this rabbit hole together.

So your biz has got to the point where one man/woman can no longer deliver it all alone - phew, it's exhausting right - we get it. So when that time comes you have a decision to make ...

  1. Outsource to a subcontractor/contractor

  2. Hire/employ either a casual, part time or full time employee, trainee or apprentice

What's the diff?

  • A contractor provides services to your biz but really is working for their own biz

  • An employee services your biz and performs their work as a representative of your biz

If that doesn't go deep enough for you then the following sure will as there are alot of sniff tests that you can apply to determine if someone is a contractor or employee including:

  1. CONTROL - you can control what an employee does in their job, a contractor can choose how, where and when their work is done

  2. REMUNERATION - an employee is usually paid for hours worked, price per item, activity or commish whereas a contractor usually works for a result or outcome

  3. DELEGATION - an employee usually has to perform the work themselves whereas a contractor is free to delegate willy nilly

  4. TOOLS OF TRADE - the biz normally provides the tools of trade required for their employees, a contractor? nope you bring your own buddy

  5. RISK - with an employee you hold the risk internally, it's usually not passed to the employee, not so when it comes to a contractor

  6. GOODWILL - you own the goodwill made from an employee, whereas a contractor builds their own (not for your benefit)

So now you know the difference, when is the perfect time to hire an employee or is there one? Well, not really as it's different for everyone. Do you invest early and and take a hit to profitability for a time to scale up or do you wait till the profit is there and work a bit harder for a time to then hire? It really does depend on your risk appetite and need and to be honest we can't answer that question for you (we can run some numbers to help but ultimately the decision is yours). What we can do though is give you the buffet menu of what you need to do if you do decide to hire an employee, so here is a list of the big tickets items you need to consider/do (disclaimer, this is not exhaustive):

  1. Assess the biz needs - tasks the employee will need to do, what skills/qualifications they should have, how long you will need them for, you get the gist

  2. Go through a rigorous hiring process (now we aren't HR consultants so best to do your own googling here but the website is a pretty good one to check out)

  3. Make sure you have an employment contract in place (lawyers are good for this one)

  4. Get all your employment registrations in place, ie, PAYGW with the ATO and Return to Work (we can help here 😉)

  5. When your employee starts they will need to fill out an online commencement form through ATO online services (this replaces the tax file number declaration form) AND a superannuation standard choice form

  6. Do your research to make sure you pay them the correct rate from the award (if applicable) or fair wage (your industry body can usually help here or Fairwork has some great guidance)

  7. Then it's time to set them up in your payroll compliant software (shoutout to Xero here, as they have a pretty good, nah, great one 😉). Heads up this usually needs to be done by a professional (ie, us) as there are big risks in getting this bit wrong. You can even get your employee to enter timesheets and give them access to their MyXero portal where they can apply for leave, obtain payslips, the whole shebang, but we digress ...

  8. We also highly recommend you register for AutoSuper through Xero so that it makes the quarterly superannuation payment super easy. We cannot highlight enough the importance of paying superannuation on time - otherwise it becomes non deductible with hefty non remittable fines. If you don't utilise AutoSuper through Xero you will need to find another superannuation clearing house to utilise.

  9. Then it's time to pay your employee. When you process payroll in Xero through payruns it will calculate the gross wage, PAYGW, superannuation, leave accruals and provide payslips. You then also need to file the payrun to the ATO through Single Touch Payroll (if you want to know more on this one click here)

  10. When you lodge your biz BAS each quarter (or month) you will declare the PAYG Withheld (PAYGW) on wages for your employee and make payment

  11. At the end of each year you will need to finalise the Single Touch Payroll for the year (so your employee/s can lodge their ITR, and trust us they want it done quickly, you will get requests on the first day of the new year - don't say we didn't warn you 😂)

  12. Once you are registered for Return to Work they will assess a monthly/annual amount that you need to pay and you will also need to prepare an annual reconciliation and estimate each year.

  13. Now if you need to end employment there are rules and regs around that too, once again a visit to the Business SA website will do you wonders here.

Note: we haven't covered payroll tax, let's worry about that if the group's annual wages >$1.5 million and don't get us started on fringe benefits tax (FBT) cos that's a whole other blog.

It's a lot of stuff right? and you need to get it right! Make sure you enter with your eyes wide open and have the right payroll professionals (us 😉) supporting you every step of the way or taking charge of it for you ... for your own piece of mind as ignorance is not bliss on this one, trust us!

So we have focused ALOT on employees but what about contractors? For a contractor it's easy peasy - they invoice you for their work and you make payment on their payment terms and you get to deduct the expense in your biz (Disclaimer: there are some wider definitions of employee for Superannuation and Return to Work purposes so best to speak with a professional to ensure your not doing the wrong thing there).

After all this, I think you can see the difference in the legal, risk, administration and backend work required in hiring an employee v contractor, let's call it the great divide shall we. And just to be super dooper crystal clear, after reading the above you may be tempted to say CONTRACTORS all the way my friends BUT you have to remember the sniff tests above, if the relationship has the characteristics of an employee then that is how they should be treated (ie, if it looks like a duck and quacks like a duck it's a duck ... or should I say employee).

So enter this decision educated and prepared to do the right thing as an employer because the last thing you want is the taxman-ian devil (aka the ATO) and Fairwork knock knock knocking on your biz door for doing the wrong thing.

Still have questions? That's OK, feel free to make contact with one of our oh so cool not nerdy at all team members today.

Disclaimer: The information provided is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice

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