Employees vs Contractors
There is a distinction between employees and contractors, and it is crucial to differentiate them under tax law. Simply, an employee is part of your business, while a contractor is running their own business and co-operating with your business.
There are six main criteria in determining if a worker is an employee or a contractor:
| Employee | Contractor |
| Ability to sub-contract/delegate: An employee cannot sub-contract/delegate the work and they cannot pay someone else to do the work. | Ability to sub-contract/delegate: A contractor can sub-contract/delegate the work and they can pay someone else to do the work. |
| Basis of payment: An employee is paid:
– For the time, they work – A price per item or activity – A commission |
Basis of payment: A contractor is paid for a result achieved based on the quote they provided. |
| Equipment, tools and other assets:
– An employee is supplied with all or most of the equipment, tools and other assets required to complete the work. – Or an employee provides all or most of the equipment, tools and other assets required to complete the work, but is paid an allowance or reimbursement for the cost of the equipment, tools and other assets |
Equipment, tools and other assets:
– A contractor provides all or most of the equipment, tools and other assets required to do the work. – A contractor does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets. |
| Commercial risks:
An employee does not take commercial risks. Your business is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work. |
Commercial risks:
The contractor takes commercial risks. The contractor is legally responsible for their work and liable for the cost of rectifying any defect in their work. |
| Control over the work:
An employee must follow the instruction from their employer subject to how the work is performed. |
Control over the work:
A contractor has freedom in the way the work is done subject to the specific terms in any contract or agreement. |
| Independence:
An employee is working dependently on your business. An employee work within and is considered part of your business. |
Independence:
A contractor is operating their own business independently. A contractor performs services as specified in their contract or agreement and is free to accept or refuse additional work. |
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