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Super and tax obligations vary depending on whether an individual is a contractor or employee so it’s important to know the difference.

Tax for contractors

Independent contractors work for themselves – a contractor can be a sole trader working in his or her own company, trust or partnership. A contractor often uses their own methods and tools to complete their work and negotiate their fee. They may work for more than one client at a time.

A contractor needs an Australian Business Number or ABN to work so they can invoice customers. Otherwise, they would need to withhold 47% of their total payment for tax.

If you employ a contractor, they would usually look after their tax obligations so you don’t need to withhold from payments unless they do not quote their ABN or you have an agreement that you would withhold tax from payments. If the contract you have with the contractor is principally for labour, you might still need to pay super for them. However, you don’t have FBT obligations.

It is unlawful to treat an employee as a contractor so make sure you’re not making this mistake or penalties may apply. If you’re a contractor and earn above the tax-free threshold, you will need to pay income tax. Your tax rate will depend on how high your income is. As a contractor or business owner, make sure you save for the tax you’ll need to pay so know what your tax rate is.

Superannuation for contractors

It is advisable to make superannuation contributions when self-employed so you put money aside for retirement. The Government offers a co-contribution scheme to boost retirement savings as an incentive. If you’re a middle or low income earner and you make personal after-tax contributions to super, the Government may make a contribution up to $500.

If you’re registered for GST, your services are subject to GST. You must register for GST if your non-profit org has over $150,000 of GST turnover, your business has over $75,000 of GST turnover or you want to claim fuel tax credits for your business.

Personal services income or PSI is income mainly produced from personal skills. To see if your income is PSI, know the income received from your contracts or invoices. If over 50% of your income is for your skills, expertise or labour, all your income is PSI. If less, then none of your income is PSI.

Contact Sky Accountants, your contractor accountants for advice and help with anything about trades, contractors and business!

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Sky Accountants Ballarat

Phone: 1300 328 855

Office Address: 902 Howitt Street, Wendouree, Victoria 3355, Australia

Postal Address: PO Box 2234, Bakery Hill, Victoria 3354

Sky Accountants Gisborne & Macedon Ranges

Phone: 03 97444522

Office Address: 45 Hamilton Street, Gisborne, Victoria 3437, Australia

Postal Address: PO Box 270 Gisborne Victoria 3437