Do you pay your contractors super? You might need to.

in: Bookkeeping

If you think a contractor is your way around employee benefits like superannuation, think again.

I recently overheard a man say, “The law changed so that contractors always get paid super. It’s that simple.”

This statement isn’t correct. Change ‘always’ to ‘sometimes’ and it would be.

But that still doesn’t make it simple.

Contractors (also known as freelancers) are on the rise and chances are, you’ve worked with one or two of them. There are a lot of perks to hiring a contractor over an employee, like if you’re only after project work that requires a specific skill. You might even think that they’re preferable to employees because you don’t need to worry about payroll or employee benefits like super.

However, that’s where you might be in trouble. Because if you treat your contractor like an employee, then you have to pay them like one. Specifically, you owe them superannuation contributions.

Here’s why.

The Superannuation Guarantee Act specifies when and how you pay an employee super. What changed was the classification of a contractor. In 2005, a new ruling about who was considered an employee came into effect. It basically states that a contractor can be considered an employee and when they are, you have to pay them super.

So when are they considered an employee? You might think that unless they’re on the payroll, the person they work with is not an employee. But payroll isn’t the only factor.

To help you figure it out, here are some questions to think about:

  • Who is in control of the work?

Contractors stay in control of who they work with and when. They can refuse and accept work as they choose.

  • Can the contractor delegate the work to someone else?

Contractors can subcontract their work to another contractor, but you will still only deal with the contractor you hired.

  • Can they work for other people?

Contractors have multiple clients. If you have an agreement with a contractor that states they cannot work for anyone else, they’re more likely to be considered an employee.

Note that this is not everything to consider. The ATO has a great page that describes the differences between employees and contractors and includes a few more points. You can check it out here. You can also use the ATO’s Employee/Contractor Decision Tool.

If you think they could be under the ‘employee’ classification, talk to your accountant about what this means for your business. Because if you have to pay super, it will apply retrospectively.

For more information, check out these other pages:

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