Small Business Tax Implications of Hiring Independent Contractors

Independent contractors are self-employed individuals, sole traders, or companies that complete work for your small business. They aren’t directly owned or employed by your entity. 

Instead, you pay them an agreed fee for work like IT handling, cleaning, or maintenance. Although they work with your businesses, you don’t hold the same tax obligations as you do with employees. 

Let’s figure out these implications together.

Should You Pay Tax For Independent Contractors? 

You don’t pay or withhold income or goods and services tax (GST) for independent contractors because they handle their own finances. 

As they’re a separate entity, you can’t put independent contractors on a pay-as-you-go (PAYG) scheme, as you would for employees.

Providing benefits, like paid travel, accommodation, or entertainment, you may be liable for fringe benefits tax (FBT). 

What Is a TPAR?

The Australian Taxation Office (ATO) requests all businesses that have worked with a contractor to submit a Taxable Payable Annual Report (TPAR). Lodge this by the 28th of August annually.

This information includes any payments made to a third party, such as an independent contractor. The ATO uses these reports to ensure these companies are paying taxes correctly. 

Are You Liable For Independent Contractors’ Super Funds? 

If you hire an independent contractor primarily for their labour, you could be responsible for paying super funds. This liability applies when you hire a contractor for their skills, expertise, time, and effort rather than to receive goods.

How to Set Employees and Independent Contractors Apart

An employee typically signs a contract confirming their status. They provide a direct service to your small business and receive an agreed wage or salary. 

Contractors work for themselves. Your business may hire them for one-off jobs, like repairing plumbing systems or designing a website. You could also sustain a long-term working relationship to handle ongoing responsibilities like IT department handling or administration.

Get Your Taxes Right Every Time

As a small business owner, your mind is likely full of growth strategies and stabilising your current establishment. Take the heat off with the friendly support of Accounting Tax Solutions. 

Our business services ensure you hit every tax deadline, lodge every document, and prepare your finances for every obligation. Contact us to get started.